Some divorce scenarios are more challenging than others. When couples stay married for longer and share more property with each other, they may have a difficult time separating their finances when they divorce.
Particularly when assets have a strong association with future financial stability, people may fight to retain those assets for their own protection. For example, married couples often find themselves disagreeing about how to divide retirement savings. The resources that people set aside for their comfort when they no longer work can represent both sacrifices during the marriage and financial stability later in life.
People often resent needing to divide their savings, but doing so is often necessary. At the very least, spouses can avoid diminishing their retirement resources by using a qualified domestic relations order (QDRO). A QDRO helps prevent penalties and taxes that could further diminish retirement savings.
When do spouses typically draft a QDRO as part of a divorce?
A QDRO is an option after the final property division order
Some people make the mistake of trying to handle the division of high-value property early in the divorce process. If they don’t follow the right procedures, they may not be able to avoid taxes and penalties when dividing an account.
A QDRO is a document that reflects the final property division order. The relationship between the QDRO and the court order dividing the marital estate is what helps protect the couple from early withdrawal penalties and taxes. Therefore, it is standard to draft the QDRO immediately after the final hearing in family court.
The lawyer of one spouse uses the final property division decree to guide the terms included in the QDRO. Generally, both spouses have to review and approve the QDRO before one spouse submits it to a plan administrator.
When done appropriately, recording a QDRO can split the balance in one retirement savings account into two separate accounts. Spouses who attempt to divide an account before the end of a divorce could be at risk of taxes and penalties. Those who wait too long after a divorce could be vulnerable to account depreciation due to market fluctuations or inappropriate withdrawals made by the other spouse.
Drafting and utilizing a QDRO can be an important part of a high-asset divorce. Those who act to protect their retirement savings can rely on those resources when they stop working in the future.