At one time, you and your spouse may have talked about what your life would look like after each of you retire. Perhaps you wanted to travel more together, spend more time with the grandkids or find a quiet spot to live out your golden years together. To that end, you began faithfully contributing to a retirement plan through your employment.
Now, those dreams of retirement together have come to an end. You face divorce, and more than likely, other than your marital home, your retirement plan is your biggest asset. Even though you earned the money in the account, you discover that your retirement account is part of the marital estate, and your spouse is entitled to a share of it. You may not be happy about having to share that account in the divorce, but you are even less happy about the prospect of paying an early withdrawal penalty.
You can avoid the tax penalty for early withdrawal
During the divorce process, you agreed to -- or the court ordered you to -- give a portion of the funds in your retirement account to your former spouse. That's the bad news. The good news is that you may not have to pay that 10 percent early withdrawal penalty. With a qualified domestic relations order, you can fulfill your obligation without paying extra for it. This order, which you receive from the court, adds your ex as an alternate payee on your retirement account.
Sounds easy enough, but if not properly drafted, it may not save you from giving up those extra dollars. In order to be valid, the QDRO must include the following:
- Your ex's name and address
- Your plan owner's name and address
- The percentage going to your ex
- How you determined that percentage
- How you intend to make the payments
- How many payments are covered by the QDRO
Once issued by the court, the QDRO then goes to the administrator of your retirement plan. This is where it can sometimes get tricky. Your plan may require certain language in order to consider the order valid. It would be a good idea to consult with your plan administrator before drafting and executing a QDRO to make sure that it passes scrutiny before going to the court.
Making sure that your QDRO meets the legal requirements of the federal government, the court and your plan administrator may present a significant challenge. To help avoid costly mistakes, you could do what others in your position have done and take advantage of local legal resources here in Gettysburg.