Obtaining a qualified domestic relations order (QDRO) is integral to the divorce process for many Arizona residents. So, what is a QDRO (and when do you need one for your divorce in Arizona)? Here’s what you need to know:
What is a Qualified Domestic Relations Order (QDRO)?
A qualified domestic relations order is a formal court order that allows divorcing spouses to divide their retirement assets without adverse tax consequences. While qualified retirement accounts (i.e., IRAs, Roth IRAs, and 401(k)s) and pensions are eligible for tax benefits such as deferral or non-taxation of distributions, penalties apply if retirement savers take distributions before retirement age.
Obtaining a QDRO allows divorcing spouses to transfer their retirement assets between one another without triggering early distribution penalties.
Let’s consider a common scenario: A couple has been married for 20 years, and during that time, one spouse has accumulated $500,000 in retirement savings while the other has only earned $100,000. Assuming an equal distribution of the couple’s other marital assets, each spouse would be entitled to half (or $300,000) of their collective retirement savings. While transferring $200,000 in retirement assets from one spouse to the other would generally trigger tax penalties, obtaining a QDRO prevents this.
Are all retirement assets covered under a QDRO?
While a QDRO can divide all types of qualified retirement accounts and pensions, this doesn’t necessarily mean that all of a couple’s retirement assets will be covered under a QDRO. Under Arizona law, divorcing spouses must only divide their “community” property. While there are some exceptions, this generally means that only assets acquired during the marriage are on the table.
This also generally means that retirement assets accumulated before marriage are not subject to division during the divorce process. So, for example, if a spouse who has a $500,000 retirement account accumulated $100,000 in retirement savings before the date of marriage, only $400,000 would be subject to division. This is critical to remember, and for spouses who started saving for retirement before they got married, it is essential to work closely with an experienced divorce lawyer who can accurately calculate the “separate property” portion of their retirement savings.
When Do You Need a QDRO for an Arizona Divorce?
With all this in mind, when do you need a QDRO for an Arizona divorce? The short answer is that divorcing spouses need a QDRO if they divide one or more retirement accounts (or pensions) as part of the divorce process. Obtaining a QDRO is a relatively straightforward process, and it can result in substantial tax savings that benefit both spouses.
What Are the Benefits of Obtaining a QDRO During Your Divorce?
Along with avoiding unnecessary tax liability, obtaining a QDRO during a divorce in Arizona can also have several other benefits. Here are some of the main reasons to consider a QDRO if you have retirement assets that will be subject to distribution during your divorce:
- Avoiding Early Distribution Penalties: We’ve covered this already, but it’s essential, so it bears repeating. Without a QDRO, dividing retirement assets during a divorce (before retirement age) will trigger early distribution penalties. Unless an exception applies, these penalties are generally calculated as 10% of the early distribution at the federal level. In most cases, this will be a significant sum of money that divorcing spouses can better use for other purposes.
- Protecting the Rights of the “Alternate Payee” – When divorcing spouses obtain a QDRO, the spouse who receives a portion of the other spouse’s retirement savings is called the “alternate payee.” With a QDRO in place, the alternate payee’s right to distributions from the wage earner’s retirement savings is protected, meaning that the wage earner generally cannot step in and disrupt the distributions.
- Facilitating an Equal Division of Community Property – For many couples, their retirement accounts are among their most significant assets. As a result, dividing their retirement savings is essential for equally dividing their assets during the divorce process. Obtaining a QDRO facilitates an equal distribution of community property without unnecessary adverse tax consequences.
While these are some of the main benefits of obtaining a qualified domestic relations order during your divorce, QDROs can also have other benefits. When you speak with a lawyer at Weingart Family Law about your divorce, your lawyer will walk you through everything you need to know.
What Are the Alternatives to Obtaining a QDRO in Arizona?
Along with helping you understand the benefits of obtaining a QDRO, your lawyer can also help you understand the available alternatives. While obtaining a QDRO will make sense in many circumstances, it isn’t always the best option for handling retirement assets during an Arizona divorce. Two examples of common alternatives include:
- Each Spouse Keeps His or Her Retirement Savings – If both spouses have retirement assets, they can choose to keep their respective accounts or pensions rather than obtaining a QDRO.
- One Spouse Gives Up the Right to Retirement Assets for Other Property – Instead of dividing a retirement account or pension, divorcing spouses can agree that one spouse will keep the entire account or pension. In contrast, the other spouse keeps other community property of substantially equal value.
How do you decide which option is best for you? If you need to obtain a QDRO, what are your next steps? Successfully navigating the divorce process is all about making informed decisions, and this starts with engaging an experienced divorce lawyer. To confidently discuss your options with a lawyer at Weingart Family Law, contact us to request a free consultation today.
Request a Free Consultation with a Divorce Lawyer in Tempe or Phoenix, AZ
If you want to speak with a divorce lawyer at Weingart Family Law, please call 480-923-9063 or contact us online. We will schedule your free consultation in person or over the phone soon.