Worrying about your financial future is a natural feeling as you head into divorce. It’s been said that nobody “wins” when the final property judgment is handed down. While marital property division over assets such as real estate and investments are always a concern, if you are divorcing later in life, the more likely it is that your retirement savings will also play a major role.
The problem is that splitting retirement accounts is notoriously tricky. You face significant tax consequences for withdrawing funds ahead of retirement age. And you can’t just allocate a fund any way you want. To redirect any payments from a retirement fund, you need a QDRO.
The basics of the QDRO
QDRO stands for Qualified Domestic Relations Order. In short, it’s a court order that can provide you access to your ex’s retirement account—or that allows your ex to access your account. And because Michigan generally treats retirement accounts as marital property, a QDRO can play a huge role in protecting your financial future.
For starters, a QDRO can:
- Keep retirement accounts intact. With a QDRO, you don’t need to withdraw funds to split a retirement account during property division. This means you can avoid the tax penalties for early withdrawal and the account can continue to grow.
- Name an alternate payee. This is the QDRO’s primary function. Without a QDRO, the account’s administrator can only direct payments to the owner. A QDRO can direct the administrator to make payments to a spouse, former spouse, child or another dependent individual.
- Make direct payments. A QDRO directs the account administrator to make the alternate payments directly to the alternate payee. This means you don’t need to coordinate with your ex to make or receive the payments.
- Offer flexibility. Do you want a lump sum payment? Scheduled payments? Or do you want to leave the money in the retirement account until you’re ready to retire? You have options. A former spouse can even access the funds early without the tax penalty for early withdrawal.
But it’s important to get things right. The government imposes strict limits on the QDROs, and mistakes could invalidate your order. If you want to use a QDRO in your divorce, you want an attorney who will:
- Structure the order correctly
- Link it effectively to your goals for property division, child support or spousal maintenance
- File it at the right time
You might expect every attorney to understand how to work a QDRO to your advantage, but that’s just not the case. Though QDROs can be invaluable in divorces with retirement funds and pension plans, many attorneys don’t understand how to use them well.
People going through divorce often worry about their financial security, especially as they draw closer to retirement age. A good QDRO can make you confident in your future.