What is a QDRO? A QDRO is a term that you might hear when considering divorce. No one wants to think about divorce, but if it happens, a QDRO or qualified domestic relations order will be in your best interest. A QDRO is an order from the court that requires a part of a retirement plan to be paid to another person.
The other person referred to as the alternate payee might be a former spouse or a dependent. The QDRO allows for assets to be divided fairly between spouses who are divorcing. You can draft a QDRO as a separate interest plan or a shared interest plan.
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Separate Interest QDROs
QDROs are not required when spouses divorce, and it is up to the spouse entitled to benefits from their spouse’s retirement fund to have their attorney complete a QDRO.
Depending on the plan used to divide a pension, there could be a difference in the amount and duration of payments. When deciding on which plan to use and how to file a QDRO, it is best to consult with a lawyer and a tax expert to ensure that you end up with the best financial result.
Separate Interest QDRO
A separate interest QDRO is based on the alternate payee’s lifetime. The alternate payee is to be paid for their entire lifetime regardless of the longevity of the participant. The benefits will be adjusted actuarially to maintain payments throughout the alternate payee’s lifetime. Due to the lifetime payments, a survivor’s benefit is not usually necessary.
With a separate interest QDRO, the alternate payee can start receiving payments as soon as the participant reaches their earliest retirement age. This applies even if they do not retire.
The separate interest QDRO provides the most significant financial flexibility for the alternate payee without having any financial repercussions for the participant.
One thing that is important to note is that a separate interest QDRO can only be applied when the participant has not yet begun receiving retirement benefits.
Payments from a shared interest QDRO do not begin until the participant retires. The alternate payee shares the retirement income each month, as its name suggests.
Payments to the alternate payee will end after the participant’s death. Suppose the alternate payee dies before the participant. In that case, retirement benefits will be paid to the alternate payee’s estate or revert to the participant, depending on the retirement plan guidelines. The only way to extend the benefits is for the participant to elect a qualified joint and survivor annuity (QJSA).
Basics of Separate Interest QDRO Calculations
Spouses who are divorcing need to know how to calculate a QDRO. There is a standard QDRO calculator that attorneys use to find out the amount payable to their clients. It is in your best interest to deal with an attorney familiar with QDROs.
It will be the attorney of the spouse seeking the separate interest retirement funds who calculates a QDRO and writes an order. The attorney must write the order in clear and concise language that states every agreement term.
The attorney will send the completed order to the retirement plan administrator. The administrator will review the order and make any necessary adjustments. Once finalized, the order is sent to the judge to be signed.
How To Calculate QDRO
There are several steps to calculate a QDRO.
- Determine the present value of the participant’s retirement benefit.
- Calculate the amount assigned to the alternate payee based on the QDRO’s terms.
- Once the amount has been determined, convert the amount into an annuity to be paid to the alternate payee.
How Long Does It Take To Receive Funds From a QDRO?
There are several ways that an alternate payee can choose to receive their funds. The alternate payee must ensure that their choice is established in the QDRO.
The alternate payee can choose to receive the retirement benefit in a lump sum. If the alternate payee deposits the amount into a non-IRA account, the alternate payee will pay income tax. It would be wise to invest the money in another retirement account to avoid paying taxes.
The beneficiary can also choose to receive the money in installments to spread the income over time.
Another option is to leave the alternate payee’s portion in their spouse’s account, but they retain the ability to invest their portion as they see fit.
Regardless of the payment method, the participant does not have to retire before the alternate payee can start receiving their benefits when they are eligible.
If the Alternate Payee Is Entitled to Early Retirement Subsidies
The QDRO will detail the entitlement of early retirement benefits, and it will be used to calculate the retirement amount that the alternate payee is entitled to.
- Calculate the amount payable to the alternate payee established by the QDRO.
- Subtract the amount owed to the alternate payee from the participant’s total accrued retirement benefit and multiply it by the early retirement factor (ERF).
The benefits payable to the alternate payee will be based on their start day compared to the participant’s start date. Adjustments might have to be made in consideration of the dates of retirement.
If the Alternate Payee Is Not Entitled to Early Retirement Subsidies
If the alternate payee is not entitled to early retirement subsidies, then the QDRO calculation is the first method mentioned. The present value of the participant’s retirement fund must be determined. Once this has been done, the terms of the QDRO will establish the amount payable to the alternate payee.
Conclusion
It would be wise to retain a financial advisor to determine whether a separate interest or shared interest plan is the best option for your economic situation. It would also be wise to retain an attorney to ensure that your QDRO is done correctly. An attorney will ensure that you receive everything that you are entitled to.
Dividing assets during a divorce can be a painful and complicated process. Retirement benefits might be the furthest thing from your mind, but it is vital to protect your financial future. A QDRO might be the order that helps you retire in the way that you have always looked forward to.
