Retirement accounts are often some of the most difficult assets to divide in a Massachusetts divorce—particularly qualified retirement plans. Federal laws require special treatment of the assets. In many cases, it is necessary to set up a Qualified Domestic Relations Order(QDRO) to allocate funds between divorcing spouses.
While the complicating factors add to the complexity of the divorce, both spouses can gain advantages from mechanisms such as a QDRO. It is essential to work with a divorce attorney who understands how to handle retirement accounts properly to meet legal requirements and help you gain the maximum benefits.
Understanding Qualified Retirement Plans
Qualified retirement plans are plans where contributions are made from pre-tax dollars, so the tax is deferred. Many retirement plans offered through employment, such as 401(k) plans, are qualified retirement plans. Those types of plans are governed by the Employment Retirement Income Security Act (ERISA) as well as the U.S. Tax Code and IRS rules.
The rules are strict when it comes to distributing benefits from qualified retirement plans. For that reason, instead of the standard domestic relations order (DRO) typically issued to divide retirement benefits in divorce, qualified retirement plans require a qualified DRO. Many retirement benefits cannot be divided without a court order.
What a QDRO Involves
An attorney may draft a QDRO or may have the order drafted by a professional that specializes in this type of financial document. If the divorce attorney does not draft the actual document, they will be involved in specifying the terms that need to be included based on the valuation of the retirement benefits and the allocation of those benefits.
Valuing retirement benefits is a complex task. Factors to be taken into consideration include:
- Whether the account is a defined contribution plan or a defined benefit plan
- When the assets began to accrue
- The cut-off date for marital property
- Whether the value is determined based on the date of divorce or the date benefits are paid
- Whether funds contributed before the marriage are considered separate property
Depending on the number and complexity of accounts involved, it may be necessary to use more than one QDRO to divide all retirement assets. An attorney with an eye on costs should draft the separation order to specify that the accounts will be divided using as few QDROs as possible.
Benefits of a QDRO
A QDRO is necessary for a spouse to receive a share of a retirement plan that is not theirs. But the spouse who participated in the retirement plan can gain some benefits from a QDRO as well. First, withdrawals from accounts made subject to a QDRO do not incur penalties for early withdrawal.
Money distributed from a retirement plan under a QDRO is taxable as income, so when some of those funds go to the ex-spouse, that spouse has to pay the tax on the money, and it reduces the tax liability of the retirement plan participant.
Work with a Divorce Attorney Who Understands How to Efficiently Handle Retirement Plans
Retirement assets may be the most valuable marital property many couples own. It is crucial to ensure that these assets are valued correctly, divided fairly, and managed in accordance with legal requirements.
If your divorce involves complex assets such as qualified retirement plans, consult the experienced divorce team at Koiles Pratt Family Law Group to find out how we can protect your interests and help you make the most of your opportunities.