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Email Consulting Guidance – QDRO or Transfer Incident to a Divorce

Posted by James M. Carlson
Mar 06 2019

Q-1 If a QDRO is required and there are retirement plans at several.different providers, some with Roth balances and tax deferred balances, are the parties able to designate which retirement account the QDRO will apply to and whether it be taken from Roth or tax deferred portions?

A-1 In a divorce, the two spouses will negotiate the division of their assets, including their IRAs and other retirement plan assets.

In a divorce there will either be a settlement agreement signed by both parties or if no settlement, a court order will need to define who gets/keeps the retirement assets, including IRAs. The two parties need to reach a settlement or a judge will need to define in the court order.

QDRO is a term applying to 401(k) and other retirement plans. Qualified Domestic Relations Order.

By definition a QDRO is a court order. Federal law states a person’s 401(k) funds are exempt from any creditor (except the IRS), including a former spouse. However, there is a limited exception for divorce situations. If the QDRO rules are met a state court can require the transfer of 401(k) assets within the 401(k) plan from one spouse to the other spouse (the alternate payee). The alternate payee most likely will be subject to the same distribution rules applying to the participant. That is, the alternate payee may not be entitled to an immediate distribution. A settlement agreement is not sufficient to transfer

401(k) or other pension funds from one spouse to the other spouse. There must be a QDRO.

A transfer incident to a divorce is the term used with respect to IRAs. A state court judge (or pursuant to a settlement agreement) does have the authority to have the IRA assets of one spouse transferred to the other spouse.

Such a transfer is not a taxable event.

Many times accountants and attorneys use the term QDRO to include IRA transfers. They should not.

There must be a specific QDRO for each retirement plan.

With respect to IRAs, the settlement agreement or the court order must be specific with each to each IRA.

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