Sep 30, 2024 -

Posted at 10:41 am Rachael DeCosta

Scenario: I am 52 years old, divorcing, and our retirement assets are in my spouse’s 401(K). Now what[1]?

Lack of money is a fear many may have when divorcing over 50 years old, aka “Gray Divorce.” In Gray Divorces, the division of marital property is often front and center, as both spouses are reluctant and fearful of change in the standard of living and generally anchor to what they believe they are “owed” or is “theirs.” Employer-sponsored retirement plans are often one of the larger marital assets, that can cause confusion, and require a court order for the division. The court order is called a Qualified Domestic Relations Order (QDRO).

Employer-sponsored retirement accounts (those governed by ERISA) require a QDRO to meet the plan’s mandates and specify how retirement assets will be divided between the divorcing spouses. The QDRO outlines details such as the time frame for the distribution, the percentage each spouse will receive, and how the distribution will be received. A comprehensive QDRO that needs to be appropriately constructed may cause lengthy distribution delays, unanticipated penalties, and/or tax consequences.

Here is a simplified overview of how the QDRO process generally works:

  1. Drafting the QDRO: The divorcing couple, most often with their legal representative, draft a QDRO outlining how the retirement assets will be divided.
  2. Plan Administrator Approval: The QDRO is submitted to the retirement plan administrator in draft form for review. The plan administrator ensures that it meets the plan’s requirements and complies with relevant laws.
  3. Court Approval: Once the plan administrator approves the QDRO, it is signed by both parties and submitted to the court for final approval and a judge’s signature. The court ensures that the QDRO is fair and complies with the divorce settlement.
  4. Distribution of Assets: A certified copy of the final QDRO is sent to the Plan Administrator for final approval, acceptance and distribution of assets.

How can I receive distributions specified in the QDRO?

The following are common distribution strategies. However, please be sure to comply with Plan documents and regulations.

  1. Lump Sum Distribution: This option involves making a single lump sum payment on the designated portion of the retirement account. While this provides immediate access to the funds, it could also result in tax implications.
  2. Direct Rollover to an IRA: The recipient spouse can choose to have their designated share of the retirement account transferred directly into an Individual Retirement Account (IRA). This allows the funds to continue growing tax-deferred, avoiding immediate taxes and penalties.
  3. Partial Direct Roll-Over to an IRA and Partial Cash Out: This strategy is used if the receiving spouse would like to cash out a portion of the Plan assets and roll over the remainder into an IRA. The assets specified to be distributed outside the IRA may result in tax implications—however, may not include a penalty.
  4. Direct Rollover to a Qualified Plan: If the recipient spouse is employed and has their own employer-sponsored retirement plan, they can directly roll over their share of the QDRO distribution into their own qualified retirement plan.
  5. Delayed Distribution: In certain cases, the recipient might be able to delay the distribution until they reach the retirement age specified by the retirement plan.

Note: If you are 59 ½, you can take the distribution without penalty at any time. However, there may be tax consequences.

It is best to seek advice from professionals who are knowledgeable about your specific financial situation and federal and state regulations to ensure that the QDRO and division of marital assets are handled correctly and that all legal and tax implications are considered. Not only can this process be complicated and overwhelming, but it can also be emotional. If you are not working with a Certified Financial Divorce Analyst (CDFA) or a financial professional to assist you with the division of marital assets and a Divorce Financial Plan, please reach out to me for questions and a complimentary consultation at rdecosta@saxwa.com.

Disclosure

The content is for information purposes only and developed from sources believed to be providing accurate information. We make no representations as to its accuracy or completeness. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Opinions expressed herein are solely those of the individual and may not be representative of SAX Wealth Advisors. Advisory services are offered by SAX Wealth Advisors, an SEC[2] Registered Investment Advisor.

[1] For Illustrative Purposes Only

[2] Registration does not imply a level of skill or expertise