Do You Need a QDRO Attorney?

Do you need a QDRO attorney? Before we get to that, let’s really understand what a QDRO is. This is basically a document issued by the court that orders how retirement assets are to be divided between you and your (soon-to-be) former spouse.

A QDRO (Qualified Domestic Relations Order) used correctly can protect your share of IRA money (and other retirement assets) in case of divorce. I thought about this issue after I received the following question a few days ago from “D”:

My husband is leaving. I know that I am the beneficiary on his IRA account. If he leaves and wants to change his beneficiaries, do I have to sign off on that, or can he do this without my knowledge?

D, as long as you are legally married he has to get you to sign off on his beneficiary form if he wants to change the beneficiary on any of his retirement accounts. If you don’t get back together and formally end the relationship through divorce, it’s another story.

Some or all of his retirement accounts will be split between the two of you. If you are lucky, you’ll both find an amicable way to split the assets. If not, the court will get involved.

Either way, you’ll get a QDRO from the court and use it to split the retirement accounts. Basically, this document allows you to take the specified portion of the retirement accounts and roll them over to your own retirement account. You won’t pay taxes on the rollover and you can continue to defer taxes on the account as long as you are otherwise entitled to defer the tax (under age 70 ½).

When you withdraw money from the account, you will pay taxes on those distributions – not your ex-spouse. It’s critical that your divorce decree include a QDRO and you execute it. If you split the assets without using a QDRO, it will be considered a taxable distribution. Yikers! That means all the money you withdraw will be subject to tax and (possibly) penalties.

If you are facing divorce, the two most important financial issues are:

1. Try as hard as you can to come to an agreement. Even if you have to give up some negotiating points that are rightfully yours, you’ll be better off if you both keep the split friendly. It’s the best way to save money in divorce. If you do come to an agreement, you can always use a service like Legal Zoom to do the paperwork for you — but they will not prepare the QDRO. You will still need an attorney to do that. But you’ll save a ton of money by working everything else out without an attorney and just let her prepare the QDRO for you.

2. Learn how to manage the money. If your spouse was in charge of handling the budget and making the investments, it’s essential that you master these two skills as soon as possible. You also have to be mindful of how to handle tax reporting yourself if it’s new to you. And of course there’s the issue of creating income. That’s enough to keep you busy for a while…right?

You have to be careful because if there are retirement assets involved, you are going to want to use (or at least consult) with an attorney who is familiar with and drafts QDROs. Don’t use a divorce attorney who doesn’t draft these herself. She’ll outsource it and you’ll end up paying double.

This of course presupposes that you’ll use an attorney for the divorce and that in itself could open up a huge can of wormy worms. As I’ve said, many divorce attorneys are adversarial. They like to stir the pot because they charge you by the hour. The more drawn out the process, the more vacations they take on the French Riviera.

Ultimately, you need an attorney who is NOT adversarial and who is well versed in using QDROs. Be mindful of this when you attorney-shop.

The best approach would be to mediate the divorce and consult with an attorney who specializes in drafting QDROs. In this case, you might use one person to mediate and another to draw up the QDRO. This will save you a big pile of cash. This savings isn’t just nice…it could mean the difference between having enough to retire and working at Costco until you reach age 97. Lawyers eat up lots of cash if you’re not careful.

If you’ve gone through a divorce or separation, how did you handle the retirement accounts and other investments? What did you do to get up to speed in this area?