QDRO, dividing your retirement accounts as part of your divorce

If you’re thinking about divorce in Washington State or in the throes of one, you’re probably concerned about what will happen to your assets, including those accumulated by you and your spouse during your marriage. For most people, the assets that first come to mind are the marital home and family business should one exist.

A category of assets that often goes overlooked is each spouse’s retirement accounts. As you may or may not realize, some retirement accounts will be subject to division during divorce. This process requires couples to complete a Qualified Domestic Relations Order, also known as a QDRO.

Aside from facilitating the distribution of your and your spouse’s retirement plan(s), the QDRO can serve another more subtle function, and that’s to bring to light your estate planning needs. Very often, when a couple is married and especially for a long time, they don’t revisit the terms of their estate plan as frequently as they should.

In a perfect world, couples would have a legal checklist handy, prompting them to consult with a Seattle estate planning lawyer about life events that could impact their estate plan. Instead, people tend to create their estate plans and never look at them again, which can lead to unintended and undesirable results at their deaths. The documents included in an estate plan aren’t those you should set, then forget. Of course, many couples don’t have an estate plan in place at all.

The good news is having to complete a QDRO in Washington State as part of your divorce will force you to take a look at your retirement accounts, what’s in them, and their terms. Like changing the batteries in your smoke detector each fall and spring when you change the clocks, completing a QDRO can be the reason why you assess your estate planning as it exists and what you’ll need to protect for yourself and your loved ones as you move forward in your new life.

What follows is a brief overview of what a QDRO covers and how it can help you during and after your Washington State divorce.

What’s a QDRO and why do you need one?

Married couples aren’t generally permitted to divide or cash out their retirement assets without financial penalty. However, once a divorce in Washington State is complete, ex-spouses may. The way former spouses divide their accounts depends on the type of plan(s) they have.

For example, if a former spouse has a 401(k) or a 403(b) plan, they will need to file a QDRO. A QDRO is a court order detailing the terms the couple has agreed upon for dividing the retirement asset. When these plans are transferred under a QDRO, they are tax-free transactions. An IRA is divided using a different process called a “transfer incident to divorce,” and the terms for dividing the IRA, or other non-qualified plans that generally don’t require a QDRO, are contained in the final divorce documents. This, too, is a tax-free process.

How much flexibility you have to divide your retirement accounts could also turn on the company you work or worked for and the parameters of the plan(s). Plans vary, so you should check the fine print. A QDRO lawyer can help.

In general, whether a retirement account will be subject to division rests on when the owner started it, specifically if it was before or after the marriage. In situations where a spouse opened the retirement prior to marrying, some of the asset could be deemed separate property. Where a spouse started a retirement account after marrying, a court will likely find that most or all of its contents are marital property and, therefore, subject to division in their divorce.  

During a Washington State divorce, it’s important to pay close attention to the type(s) of plans you have. Miscategorizing an IRA as a 401(k), for example, could result in unnecessary penalties or tax consequences that could otherwise be avoided. Consulting with a Seattle divorce and family law attorney who specializes in QDROs is, consequently, something you should think carefully about as completing one isn’t necessarily straightforward.  

How do you file a QDRO?

Having to file a QDRO in Washington State can be an arduous, time-consuming task. For starters, the form requires you to locate a lot of information about the details of your retirement plan(s) and those belonging to your spouse, especially to ensure you classify them the correct way. The form will also ask you to make decisions that can have very different financial impacts on your family and your retirement plan in the future. It’s important to discuss these decisions with a Seattle QDRO attorney instead of attempting to complete the form on your own.   

In addition, qualifying for a QDRO requires you to ensure that the Employee Retirement Income Security Act of 1974 (ERISA) covers your retirement plan(s). ERISA was created under federal law to set minimum standards for the majority of voluntarily established pension and health plans in private industry. The Act was designed to protect the individuals who are a part of these plans.

Following the filing, it’s usually the case that each plan administrator will do a review of the QDRO to make sure it complies with all relevant regulations and that there aren’t any discrepancies. The assistance of a local Seattle divorce and family lawyer who’s well-versed in drafting QDROs can really make a difference in how smoothly the process runs. They can also act as a liaison with plan administrators. 

A QDRO can help with divorce negotiations.

Completing a QDRO in a timely fashion during divorce can benefit a spouse tremendously, particularly if you’re the spouse who wasn’t gainfully employed during the marriage, isn’t a large earner, or was the lesser-earning spouse. More specifically, a QDRO can help you lay claim to a plan that doesn’t have you listed as an owner. It’s important to ask your Seattle divorce and family law attorney about any QDRO issues before you finalize the divorce. Leaving important questions to the very end can cause additional litigation and unexpected road bumps.

As detailed earlier, how much each spouse’s share of a plan is will be determined after more careful analysis by the plan administrator and your Washington State divorce and family lawyer. Under consideration will be when the plan’s owner enrolled in their plan, the duration of the marriage, the type of plan(s), and the individual terms of the plan(s), among other factors.

If you’re the higher earner, it’s likely you’ll have to give part of your retirement accounts to your spouse, and you may need to decide whether you want to also give your spouse survivor’s benefits options. Such options can have a high financial value, so it’s important to discuss this issue prior to settling the other financial components of your divorce. A properly completed QDRO done as early on in the divorce process as possible can protect you from giving your spouse more than they’re entitled to.

It’s understandable that, if you’re a plan owner, after working for so long and so hard you’re not eager to hand over a portion of your assets to your ex. However, doing so can help you in other areas of your divorce, such as spousal support. More specifically, negotiating to give your spouse a larger portion of your retirement assets could mean you making smaller spousal support payments, spousal support payments for a shorter time, or making none at all.

A knowledgeable Seattle QDRO attorney can help make sure every scenario is accounted for. This can help ensure that the division of your retirement accounts is fair and equitable to you and your spouse.

A QDRO will help you with your financial planning and estate planning after divorce.

Once your QDRO is complete, it’s time to revisit your existing estate plan to make changes and updates or create an entirely new one. Following a divorce, you may have retirement accounts with new account numbers or retirement accounts you didn’t own while you were married. You’ll need to factor these accounts into an estate plan.

It’s important to note that many retirement plans are payable on death (POD). So, make certain the beneficiaries you name on your plan are consistent with your wishes because, based on the terms of your retirement plan, those assets could pass outside your will upon your death and not become subject to probate. A seasoned Seattle estate planning lawyer can review your QDRO to ensure all of your assets are included in your estate plan.

Once your and your spouse’s retirement plans have been divided and you own them outright, you can make decisions independently regarding investments, including whether they’ll be sufficient for you to retire comfortably. If you’re already in retirement, a QDRO may allow you to draw on those accounts freely.

As you can see, completing your QDRO accurately and as soon as possible will give you peace of mind as well as pinpoint areas that need more attention. This knowledge can help you begin your next chapter with an eye toward a secure future.

A last word on the subject…

It goes without saying that every divorce situation is different. A Seattle divorce and family law practice with an estate planning department can be extremely helpful when dealing with a QDRO and its implications during and after a divorce.

Regardless of the stage of divorce that you’re at, the Seattle team at Elise Buie Family Law Group can help. To get started, contact us today.

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