Divorce can be a difficult process, especially when it comes to the financial implications. It is imperative that you have a plan in place so that you can make sure your assets are secure and you are prepared for the future. A qualified domestic relations order (QDRO) is a powerful tool to help you with this. In this article, we will cover the different withdrawal options and discuss the benefits of staying in the employer plan with QDROs.

QDRO:

A QDRO is an important part of any divorce settlement and should be discussed between parties early on in the process. It allows for the division of retirement funds (such as 401ks or IRAs) without incurring tax penalties or other fees. A QDRO must be filed in order to divide retirement accounts, and should also specify how each party's share will be dispersed from each account. This document should be drafted by an experienced attorney who understands the legalities involved in dividing assets during a divorce.

Withdrawal Options from Employer Plans:

An individual who has established a QDRO should understand the different types of withdrawals available for their retirement account. Depending on the employer plan, there may be different withdrawal options available for divorced spouses. For example, some plans allow withdrawals over time while others require lump-sum payments immediately following separation or divorce. Staying in the employer plan can provide several advantages over other kinds of retirement accounts like an individual retirement account (IRA). For instance, if you stay in the employer plan with a QDRO, distributions can be made without incurring penalties until age 59 1/2 in certain circumstances. It is important to understand all applicable withdrawal options before making decisions about asset division during divorce proceedings.

Social Security Spousal Income Benefit:

If one spouse has been married for 10 years and does not remarry before age 60, they may qualify for spousal benefits from Social Security which could increase income in retirement years. The spousal income benefit is 50% of the benefit received by the primary insurance payer (former spouse) and can be received to it’s fullest amount when the claimant reaches their own social security full retirement age (FRA). The spousal income benefit can be claimed after divorce at the earliest age of 62 at a reduced benefit amount. One caveat available to divorced spouses that isn’t available to married spouses is that the divorced claimant can receive the spousal social security retirement income benefit at age 62, even if the primary insurance payer has not yet claimed their own benefit from social security.

As you can see, there are many financial implications associated with divorce proceedings that must be taken into consideration when making decisions about asset division during this difficult time in your life. From understanding the importance of filing a QDRO to exploring withdrawal options from employer plans to considering social security benefits – there is much to consider when creating a financial plan after a separation or divorce occurs. The qualified professionals at Provident Financial Planning use their accounting, legal & CFP® expertise when working with divorcing clients so that you have confidence in your financial future.

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Blessings,

Paul S. Michel, CFP®

paul@providentfp.com