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What in the world is a QDRO and why do I need one in a divorce?

Massachusetts couples in the midst of a divorce or contemplating ending their marriages should cover all the bases with their respective settlement agreements to ensure that their future financial needs are met. Although women have entered the workforce in droves since the 1960s, 23 percent of women in America remain stay-at-home caregivers to children younger than 15. These women are especially vulnerable when the main breadwinner seeks a divorce and elects to take the bulk of his assets with him.

Enter the QDRO. A Qualified Domestic Relations Order (pronounced "Quadro") is a legally-binding order signed by the court that directs the custodian/administrator of any retirement plans of either party to split the account assets to reflect the settlement agreement terms. The QDRO covers a lot of ground -- 401(k)s, IRA balances, future earnings from pension plans, etc.

The advantages of a QDRO over a traditional settlement agreement are many. A settlement may allocate 500 percent of your IRA to your spouse. However, when you transfer half the balance to him or her, guess who gets hit with 100 percent of the tax bite? That's right -- you, along with possible IRS penalties for early withdrawal if you are below the age of 59 1/2. When a QDRO is in place, however, those funds are secured inside a qualified plan and aren't taxed until the party with ownership withdraws them.

Either attorney representing the parties may draw up the QDRO to be signed by the court. Once signed, the plan administrator of any pensions in place for the couple can take action to carve up the shares. In order to avoid forfeiting rights to benefits for which you would qualify, submit the signed QDRO to the plan administrator before the divorce is finalized. The QDRO will then be reviewed for its compliance to the plan's terms before funds are distributed.

You should bring up the equitable division of retirement assets during your initial consultation with your divorce attorney, as some may prefer to work in conjunction with a Certified Divorce Financial Analyst who can ferret out all a spouse's assets and determine how they should be divvied up.

Source: Yahoo! Finance, "The Basics of a Qualified Domestic Relations Order" Cathy Dewitt Dunn, Feb. 11, 2014

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