How to Split a Retirement Plan

How to Split a Retirement Plan

What divorced women need to know

Considering the current economic environment, it's time to cast an eye on your retirement plan. How do you handle the asset split when you're in the middle of a divorce? What are the considerations?

When you need to transfer an interest in a qualified retirement plan, you will use a qualified domestic relations order, or QDRO.

A QDRO permits you or your ex to withdraw shares and roll the money over to an IRA (to the extent current withdrawals are permitted by the terms of the qualified retirement plan).The IRA rollover procedure allows the person entitled to money from the retirement plan to take over management of the money while continuing to postpone taxes until funds are withdrawn from the IRA.

It's crucial that you obtain a QDRO before splitting your qualified retirement account with your ex. Otherwise, it's treated as a taxable distribution to you. This means you owe the IRS for money that actually winds up in your ex's pocket. For your ex, it's a tax-free windfall at your expense. On top of the income tax bill, you may also get hit with the 10 percent premature withdrawal penalty if you are under age 59 1/2.

With such severe tax consequences, you should consult with a tax professional who has QDRO experience to make sure all the paperwork is done correctly. This must happen before the divorce papers are finalized. Don't assume your divorce attorney knows how to take care of a qualified domestic relations order.

If you're using a QDRO, here are some basic terms to know:

• The person whose interest is being transferred is called the "participant" (because he or she is a participant in the retirement plan), while the person to whom the interest is transferred to is called the "alternate payee."
• The person entitled to money from a qualified retirement plan will also be responsible for paying the related income taxes when that money is received in the form of a pension, annuity or withdrawals. In effect, that person becomes a co-beneficiary of the existing qualified plan pension account.

A QDRO must meet certain requirements to be valid. These are the most important:

• QDROs are subject to ERISA (Employee Retirement Income Security Act) requirements.
• The QDRO must comply with certain guidelines set up by the pension plan administrator.
• A state authority, usually a court, must issue a judgment, order or decree addressing the marital property settlement before there's a valid QDRP. In other words, even if you and your ex to agree to divide a retirement account, there's no QDRO until a judge approves the arrangement. At a minimum, the divorce decree will need to include:

1. Name and mailing address of the "plan participant" (you) and the "alternate payee" (your ex).

2. Each retirement qualified, plan account to be split up under your divorce.

3. The dollar amount or percentage of benefits to be paid from each account to the alternate payee.

4. The number of payments or benefits period covered by the QDRO.

5. A statement that a QDRO is being established under your state's domestic relations laws and Section 414(p) of the Internal Revenue Code.

Focus on these points and you will have much more clarity about your retirement situation going forward.

Cathy Meyer is the head of About.com's Divorce Support channel. 

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