How are Retirement Plans Divided at Divorce?
Retirement funds contributed to during marriage including company match is considered community property. The biggest question divorcing couples ask; “How do we divide retirement accounts earned during marriage?” The answer is with a Qualified Domestic Relations Order also referred to as a QDRO.
What is a QDRO?
A QDRO is a special court order that contains language specific to the retirement plan being divided. The QDRO is a separate court order from the Marital Settlement Agreement. The IRS and State Franchise Tax Board have made a special code provision that retirement plans can be divided at the time of divorce without any taxation as long as it is done with a QDRO. With a QDRO transfer there is No state or federal taxes due. The QDRO enables the retirement plan to move the money from one spouses retirement account into an individual retirement account for the other spouse.
Which Retirement Accounts require a QDRO?
Any plan that is a group retirement plan is considered qualified and requires a QDRO. This would include but not be limited to the following:
Defined Contribution Retirement Plans:
- 401(k), 403(b), and 457 plans
- Thrift Savings Plans
- Tax Sheltered Annuities (TSA)
- Profit Sharing Plans
- What is a DRO?
A DRO is a Domestic Relations Order. A DRO is a similar court order to a QDRO and is processed through the family courts the same way. A DRO is used specifically for Pensions. Pensions are known as Defined Benefit Plans and include but are not limited to the following:
- Government Pensions; CalPERS, CalSTRS, FERS, SCRS etc
- Corporate Pensions
Do IRA’s Require a QDRO?
No, an individual retirement account known as an IRA does not require a QDRO to divide it at the time of divorce. But the IRA still must be divided under careful guidelines to not have to pay taxes. First there must be a Marital Settlement Agreement spelling out what is being transferred from the IRA. Second the divorce must be final before the transfer takes place. Third the financial institute that manages the IRA has certain forms that must be completed. Once the financial institute has completed the forms they move the IRA funds from one spouses IRA to an IRA for an other spouse.