If you are working through a divorce, you may have become so caught up in division of assets that you may have overlooked one key source of value in the marriage: your spouse’s pension plan. The only way to guarantee your share of this reward is through a complicated process that requires a QDRO, or qualified domestic relations order.
As a couple planning for retirement, you deserve a portion of this payout, even if you were not the employee earning it. The decision to pursue this course of action becomes easy when you consider all that you may be able to do with this financial benefit.
Landing on your feet following a divorce can be tough, and it is possible that a significant amount of cash will help you through this murky period of your life. Terms of the QDRO can specify a lump sum amount that the pension must pay out immediately. There are a couple of stipulations to keep in mind, however.
You should know that early withdrawal on any pension plan incurs a 10% tax penalty. With an accepted QDRO in place, this penalty no longer applies if you take the money from a qualified plan at the time of the divorce. You will still be responsible for the 20% income tax, but you will typically have this amount withheld and then claim it during tax time.
Many pension plans do not approve a lump sum withdrawal, but it is worth trying if you think the money is more valuable to you now. If the plan administrator or the judge rejects the QDRO, you can adjust your settlement to get the monetary assets you need.
Another option you have is to roll the funds over into your own personal IRA account. This allows you to set aside the money and grow the amount as you prepare for your own retirement. If you decide to do this, it is wise to defer payments until you reach the required age to withdraw tax-free. Otherwise, you will pay the 10% penalty, along with the income tax.
In the end, the most important thing is to make up your mind during the divorce, so that the terms can be precisely laid out in the QDRO. Without this court-approved document, there is no guarantee that you will receive any of your ex-spouse’s pension.