Qualified Domestic Relation Orders in a Texas Divorce

You may be wondering how to split a retirement account during or after a divorce. How do you get this money? Is there a penalty for spitting a retirement account? Can I take part of my spouse’s retirement account? How long will it take for me to get this money? These are great questions to consider if you are thinking about divorce or are in the process of divorce.

What is a QDRO?

A Qualified Domestic Relations Order, often referred to as a QDRO, is a document specifically designed to separate a retirement account. The QDRO was developed, under the legislature, to split retirement accounts at no cost to the participant or recipient during the divorce process. Because retirement accounts are often regulated by the IRS, individuals cannot pull money out of the account unless they meet one of the requirements for an early withdraw. However, the legislature recognized that individuals should not be punished for going through the divorce process.

Once parties agree to a property division or the Court orders a division of assets, the party receiving the benefit of the other party’s retirement account will need to prepare the QDRO. Most attorneys outsource their QDROs to a third-party service. These third-party services have an in-depth knowledge of the many different retirement plans available to individuals. A QDRO requires specific and curtailed language to meet the plan administrator’s requirements in dividing the QDRO. The Plan Administrator is the company who holds your retirement account – like Fidelity, T. Rowe Price, or Vanguard. Each retirement plan requires their own specified language and can be very technical. For example, a Fidelity IRA may require different language in the QDRO that differs from a Fidelity 401K.

What is the Process to Split a Retirement Account?

The first step is to prepare the QDRO. As stated above, most attorneys outsource QDRO’s to third party whose sole job is to prepare them. Once the third-party drafts the QDRO, the third-party service will send the QDRO to the Plan Administrator for pre-approval. The pre-approval process is essentially like sending a draft to the Plan Administrator so they can review the QDRO before it is signed by the Court. The Plan Administrator may make changes or recommendations about the language or technicalities of the QDRO or they may pre-approve the QDRO. Pre-approval means that the Plan Administrator (nine times out of ten) will approve the QDRO once it is signed by the Court.

After the pre-approval process has been complete, the third-party service will circulate the QDRO to the attorneys and/or parties in a case. It is then up to the attorneys and parties to obtain signatures and submit the QDRO to the Court.

It is typical for most attorneys to wait to submit the QDRO with the Final Decree of Divorce (the document that officially divorces a couple). Reason being is because thirty days after the Court signs the Final Decree of Divorce, the Court loses plenary power over the case. That means that the Court technically cannot sign any documents in the case or hear any other matters once that thirty-day window has passed. If the window of opportunity is missed, it is okay. A party or attorney can prepare a Petition to Enter the QDRO.

Once the QDRO is signed by the Court, it must then be sent to the Plan Administrator. Once the Plan Administrator receives the QDRO, they are then able to effectuate the division of the retirement account. The Plan Administrator will contact the party who is receiving the benefit of the QDRO to determine how the party wants the funds. The Plan Administrator often will create a new account within their company for the spouse receiving the funds or rollover the funds into an existing account. To determine what is best for your situation, you would want to consult a financial advisor.

In rare instances, the Plan Administrator may kick the QDRO back to the attorneys or parties for changes. If this occurs, the QDRO must be revised and again submitted to the Court through a Motion to Enter the QDRO.

How Does My Spouse Receive Funds Once a Retirement Account is Divided?

When dividing a retirement account, a spouse does not receive cash or a check from the Plan Administrator. The funds from the accounts are moved into a new account within the Plan Administrator’s company or rolled over into an existing account. When the funds are moved, they moved into an account with your spouse’s name only. At that point in time, your spouse can do what they wish with the funds. If your spouse chooses to withdraw the funds from their account, they will do so at their own cost. Any penalties associated with the withdraw will be taxed to them. If you are awarded funds and need liquid cash, it is important to discuss this with a financial advisor.

Often times in divorce, it is imperative to think about your cash flow after divorce. If a party has half a million dollars held up in retirement that they cannot pull from but they need liquid cash now, they may be in a bind. There are many different considerations like this when going through divorce. There may also be tax consequences a party faces when withdrawing funds from a retirement which should be discussed with a financial advisor.

How Long Does it Take to Split a Retirement Account?

The entire process outlined above can be lengthy. The pre-approval process could take anywhere from one to three months. In most cases, attorneys wait to submit the QDRO and the Final Decree of Divorce at the same time to avoid losing plenary power. Once the QDRO is signed by the Judge and falls into the Plan Administrator’s hands, you are on their timeline. In our experience, we have seen individuals obtain their money anywhere from ninety-days to up to six months. All Plan Administrators operate differently, so it is best to keep up with your Plan Administrator for an accurate timeline.

If you have further questions about Qualified Domestic Relation Orders, call Hunt Law Firm today to schedule a consultation.