Divorce and QDROs

The legal, financial, and emotional aspects of divorce make the process very stressful.  Not only will those experiencing divorce find it necessary to become familiar with the laws pertaining to divorce, alimony, and child custody and support, they will need to hold themselves together both emotionally and physically.  Arming yourself with knowledge about the financial aspects of divorce and finding ways to cope will enable you to move on to a healthy post–divorce life.

One of the biggest mistakes individuals make during divorce is failing to protect themselves financially.  One of the most common complaints results from one party failing to untangle themselves financially from their spouse.  Every decision made during divorce has financial and tax consequences.   What is the true value of any stock portfolio and what are the unrealized capital gains and deferred taxes?   Will your ex-spouse contribute to your children's college fund?  Will there be sufficient assets to provide for a comfortable retirement?   It pays to know what your settlement will truly cost you at tax time and how your divorce settlement will impact you in the short term and effect your prospects for long-term financial security.

Our office provides comprehensive financial and tax advice to individuals experiencing divorce.  We work with divorce attorneys and their clients to review the financial aspects of proposed settlements and to assist with the implemention and execution of QDRO transfers.

What is a QDRO?

A Qualified Domestic Relations Order (QDRO) is a Court Order that needs to be included in a divorce agreement when negotiating a spouse's share of the retirement accounts.  A properly drafted and implemented QDRO is often a critical piece of the puzzle.  For example, when assets are divided, often a wife will receive a portion of her husband’s retirement benefits.   In such case, a QDRO establishes the wife's legal right to receive an interest in, or a transfer of, a designated percentage of her husband’s retirement assets (for example: 401K, 403(b), and IRA accounts) and pension benefits.

What Happens without a QDRO?

Any transfer of a retirement account to a wife, or withdrawal by a husband, will be treated as a taxable distribution to the husband.  This could result in a substantial tax liability for the husband.   On top of the income tax bill, the husband may also have to pay a 10% premature withdrawal penalty if he is under age 59 1/2.  This could leave less assets to transfer to the wife.

How Does a Wife Benefit with a QDRO?

With a QDRO a transfer of a husband's retirement benefits to the wife will not be a taxable event.  Generally, the QDRO arrangement permits the wife to acquire her share of a husband's retirement account tax free and allow her to roll the money over into her own IRA.  The IRA rollover procedure allows the wife to take over management of the money while continuing to postpone taxes until funds are withdrawn from the IRA.

How Do We Help?

We can work with legal counsel to ensure that a financial separation is completed and that retirements plans are transferred and distributed through a legal rollover without adverse tax consequences.  Wayne R. Davies, CFP, ChFC can then serve as the financial consultant and investment advisor to ensure that the funds are properly invested for future financial security.