In my last blog post, we learned what can happen to your retirement account during a divorce, depending on whether your account is marital or nonmarital property. As we discussed, if any portion of the account is marital, odds are you will have to give a portion of the account to your spouse, unless you have an asset of equal value to exchange in return for keeping your retirement free and clear from any interest of your spouse.
If you have been ordered to pay a portion of your retirement to your spouse, giving those funds to your spouse is not as simple as pulling out the funds and turning them over. In fact, doing this can result in severe tax consequences. How you divide your retirement account will depend upon whether the retirement account is qualified, or non-qualified. A retirement account is a qualified plan if it is qualifies for certain tax breaks under the Tax code, where your contributions are not taxed until after you start receiving money from the plan. Typical examples of qualified plans are pension plans and defined benefit plans. A retirement account is a non-qualified plan if it does not qualify for these tax breaks. An example of a non-qualified plan is a traditional IRA.
Qualified plans require a special court order called a Qualified Domestic Relations Order, or QDRO, to divide the plan pursuant to a divorce. Qualified Domestic Relations Orders are extraordinarily complex and require certain language to divide the qualified plan properly. In fact, sometimes an actuary is required to help complete the QDRO so that the parties can ensure the qualified plan is divided properly. What makes QDROs even more complicated is many plan administrators will require different information to be included in the QDRO, otherwise it will not be accepted and the qualified plan will not be divided pursuant to the divorce. Therefore, it is best to reach out to the plan administrator prior to drafting the QDRO and determine what, if any, additional information needs to be included in the QDRO. Non-qualified plans do not require QDROs to divide them, and can often be divided by simply using the procedures and paperwork set forth by the administrator of the retirement plan.
It is important to understand that dividing your retirement pursuant to divorce is a tax free event, provided it is done properly. As set forth above, dividing retirement accounts can be quite complex (especially when a QDRO is required), and can even require the help of an additional professional, such as an actuary, to complete them. This is not a task you should tackle on your own. Our attorneys are experienced in dividing retirement accounts whether it be by QDRO or other method. If you need help dividing your retirement account, call for your free consultation today!