When “I do” becomes “I don’t,” you might think it’s over, but it’s not. Eager to sign and get it over with? Not so fast!
There’s an important financial matter, often left to the end, that if not handled correctly can mean that finalized divorce agreement may not be in your best interest when it comes to retirement assets.
Your attorney had you sign a document called a QDRO, Qualified Domestic Relations Order, which determines how retirement assets are distributed between parties. But, although you think all is fair and equitable because you and your spouse agreed to it and because a court order has been issued, you may have lost money or may face unexpected taxes and fees.
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Financial analysts can help the attorneys and the clients involved in the divorce understand the financial implications they may face.
Attorneys may refer clients to a Certified Divorce Financial Analyst to discuss and help you understand your financial situation. Your attorney knows the legalities of a divorce; however, the CDFA’s goal is to translate financial jargon of what’s fair and equitable for clients so they can make informed decisions during and after divorce.
This is an important referral, since an error on the QDRO can subject the attorney to liability and malpractice.
What is a QDRO?
- A QDRO is a judgment or order for a retirement plan’s assets to be divided.
- A QDRO can pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant.
- The amount or percentage of the participant's benefits to be paid to each payee varies. In states where marriage laws mandate a 50-50 division of assets, the amount paid is set. There’s a big misconception that this is law in every state, but in Florida, for example, the amount is whatever the judge decides is equitable.
- Financial analysts understand that the QDRO can work in favor of the client and may be able to help ensure prompt transfer of retirement assets with the assistance of a neutral party, the plan administrator, who is required by federal law to facilitate the transfer or rollover within a reasonable time frame.
Two Scenarios
Let’s say the client has a $200,000 home that is paid off and $225,000 in a 401(k). The plaintiff, in this case the husband, and his spouse agree that she should keep the house, and because he contributed to the 401(k), he will keep his retirement account. The couple plan to request the court grant an order reflecting this agreement.
It appears the husband is getting the better deal because that’s the higher number, but once the taxes and possible penalties involved with 401(k)s are taken into consideration, that may not be the case. If the attorney had brought in a CDFA, he would be able to help the attorney understand the bottom line before requesting the court to grant this order. For example, if the husband is younger than 59½, he will pay a 10% penalty and income tax on any distributions he decides to take from his 401(k). Another wrinkle with 401(k)s is that there is a provision for a one-time distribution to be transferred from a 401(k) holder to their spouse without penalty during a divorce. Again, a divorce financial analyst would know this.
In another example, a 40-year-old woman must give up 50% of her pension. Each party will receive $1.1 million. The CDFA, for example, may advise her to take out $100,000 for expenses and invest the $1 million in a tax-free roll-over. In addition, because she also has the potential to work another 25 years, she can begin building a new pension or add to the $1 million investment.
The benefits of including a financial analyst during the divorce process can be immeasurable as you develop a new financial strategy.
The CDFA’s objective is to look at the financial aspects of the divorce. Not only are the parties dealing with emotions but also the reality of financial changes.
The QDRO is entered by a court and is reviewed by plan administrators, after this happens, you should meet with a CDFA or other financial professional to help get your new financial house in order.
Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.
Rozel Swain contributed to this article.
Andrew McNair is the president, Investment Adviser Representative and Insurance Professional of SWAN Capital, which he founded in 2012. In the same year he established the Veteran Benefit Project, an organization that helps veterans qualify for VA benefits. He specializes in the fields of retirement income, long-term care, divorce financial analysis and wealth preservation, and has a strategic partnership with an attorney for estate planning services.
Andrew McNair and SWAN Capital are not affiliated with the U.S. Department of Veteran Affairs or any other governmental agency.
Investment advisory services offered through AE Wealth Management, LLC.
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