There is no other way to divide a retirement plan in a divorce or legal separation.
The division of the retirement plan by a QDRO is income tax free to both the Participant and the Alternate Payee. A cash distribution from the new QDRO account by the Alternate Payee is taxed at his or her marginal income tax rates. Even if the Alternate Payee is younger than age 59.5, there is no 10% early withdrawal penalty as long as the distribution is taken from the new QDRO account. 80% of the distribution will be immediately given to the Alternate Payee. 20% will be deposited with the IRA as a tax deposit. That 20% will be claimed on the income tax return for that year.
The valuation date is required to be included in every QDRO. It is the “snap shot” date on which the assigned percentage or dollar amount is taken as though the physical division had occurred on that date – even though the QDRO may not be done for weeks or months (or years) later. Earnings (or losses as the case may be) will be calculated beginning as of the valuation date and applied to the assigned amount. The plan administrator or its agent (such as Fidelity or Schwab) does those calculations based on its computer records.
If the separate agreement, Memorandum of Understanding, or permanent orders ruling does not list a valuation date, then we use the CRS 14-10-113(5) date. That is the law in Colorado as confirmed by Colorado Appeals Court rulings and the Colorado Supreme Court.
Many divorce or legal separation cases require more than one QDRO because there are multiple retirement plans which are held by different record keepers. Once I have the client’s case documents and personal information which is necessary to do the first QDRO, I do not have to invest any additional time to get that same information to do the additional QDROs. It takes less time to do the additional QDROs – compared to the time it takes to do the first QDRO.
For example, if two 401(k) type QDROs are needed, the fee is $290 for the first QDRO and $190 (1/3 discount) for the second QDRO. $480 for both QDROs.
The best time and the most efficient process is to get it dratted and filed with the Court at least a week before the Judge grants the Decree. That way the Judge will sign the QDRO at the same time the Judge signs the Decree. Most people do the QDRO after the Decree is granted – which is more of a time consuming hassle and it delays the assignment to the Alternate Payee. Also most Parties are more agreeable before the Decree is granted. Post-Decree relationships tend to become more adversarial and post-Decree work is more difficult and time-consuming.