Often the largest unencumbered asset of a divorcing couple is their retirement plan or IRA. While the family residence may have a higher value, it is usually encumbered by a mortgage. It is possible to transfer IRA or Retirement Plan assets from one spouse to the other, incident to a divorce, without making a “distribution” and paying tax currently.
In general, the Employee Retirement Income Security Act (ERISA) and the IRS Code do not permit a participant to assign or alienate the participant’s interest in a pension plan to another person. Under the QDRO exception, a domestic relations order may assign some or all of a participant’s pension benefits to a spouse or former spouse to satisfy marital property obligations if, and only if, the order is a “qualified domestic relations order.” The QDRO (pronounced quad row) may be included as part of a divorce decree or court-approved property settlement, or issued as a separate order, without affecting its “qualified” status. If retirement assets are assigned through the QDRO they may be transferred to the other party’s retirement plan or IRA free of any current tax liability (similar to doing an IRA rollover).
A QDRO must contain the following information:
- The name and last known mailing address of the participant and each alternate payee;
- The name of each plan to which the order applies;
- The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee, and
- The number of payments or time period to which the order applies.
A QDRO must not include:
- A requirement to provide for a benefit, or any option, not otherwise provided under the plans document;
- The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value), or
- A requirement to pay benefits that are required to be paid to another alternate payee under another order.
Issues to consider:
- Make sure a QDRO is available. There are some pension plans that do not include provisions for a QDRO.
- Review your actual needs before determining that a QDRO is needed as part of your divorce. If you need cash now or in the near future, retirement plan assets may not be the assets you wish to receive in your settlement. If you withdraw the assets from your IRA, you will have to pay income tax. If you withdraw before age 59½, you will pay an additional 10% penalty.
- A divorce may be emotional, frustrating, ugly, happy—but the end result usually has a financial outcome—consult with your tax advisor prior to signing the final papers. While you may decide to divvy up the assets 50/50, this does not mean that you need to take or give up 50 of the 100 shares of IBM. There may be tax considerations that both of you should review so that you both end up in the best financial position possible.
For more information on this topic, contact Henssler Financial at 770-429-9166 or [email protected].