Florida law considers retirement accounts as marital property, meaning the court splits them equitably during a divorce. This includes contributions made to the accounts during the marriage and the earnings on those contributions.
However, this process can become complicated because it intersects with tax laws. For many employer-sponsored retirement plans, a Qualified Domestic Relations Order (QDRO) may be necessary.
What is a QDRO?
A QDRO is a legal document that gives someone other than the original retirement account owner the right to receive all or part of the benefits from a retirement plan. In divorce cases, it would be the account owner’s ex-spouse. These orders are usually for workplace retirement plans like 401(k)s and pensions, which follow specific federal rules under ERISA (the Employee Retirement Income Security Act).
This order also provides protection for both parties. It makes sure that the non-employed ex-spouse receives their share of the retirement benefits as agreed upon in the divorce settlement. For the employed ex-spouse, it limits their risk and clearly defines their duties regarding the retirement account.
Why are QDROs necessary?
Without a QDRO, withdrawing or transferring funds from ERISA-protected retirement accounts could result in significant fines and penalties, such as:
- Early withdrawal penalties (typically 10% for taking out funds before age 59½)
- Instant income tax liability on the entire withdrawn amount
- Loss of potential tax-deferred growth on the distributed amount
For example, if you split a $100,000 401(k) with your ex-spouse without a QDRO, you might face a $10,000 early withdrawal penalty plus income tax on the total amount, potentially leaving you with less than half of the original sum for division.
How do you get a QDRO?
The process of getting a QDRO usually involves these steps:
- An attorney will draft the QDRO based on the terms of your divorce settlement and submit it to court for approval.
- The judge reviews the QDRO to ensure it follows the divorce decree and relevant laws.
- After approval, the court will send the QDRO to the retirement plan administrator, who will review it to ensure it meets the plan’s requirements.
- If approved, the plan administrator will implement the QDRO, dividing the retirement assets as specified.
This process can take several months, so working with an attorney and starting early in your divorce proceedings is important.
Protect your hard-earned assets
Decisions made during a divorce can have long-lasting impacts on a person’s retirement savings. Seeking professional legal guidance can provide valuable insights and strategies to protect your interests, potentially saving you from costly mistakes in the long run.