Unfortunately, divorce is increasingly common in our society. Because divorce entails the dividing of assets, some of which have tax implications, it is important to be aware of potential “tax traps” when you begin planning. One such trap in the area of retirement plan assets is the existence of vested account balances.
In the past, with traditional defined benefit plans, the plan participant was promised a retirement benefit, but he or she had no vested retirement account balance. However, with the shift toward defined contribution plans, vesting for employee contributions is immediate, and vesting for employer contributions builds quickly. Consequently, as more Americans participate in 401(k) plans and other defined contribution retirement plans, dividing vested retirement plan assets in divorce situations has created complex financial issues.
Protect Yourself with a QDRO
A qualified domestic relations order (QDRO) is a judgment or order that involves child support, alimony, or property rights pertaining to a spouse, former spouse, child, or other dependent. A QDRO can be used to establish one spouse’s right to part or all of the other spouse’s retirement plan(s)— and to ensure that the recipient spouse pays the tax.
To be protected through a QDRO, it must specify the following:
o The name and address of the plan participant and the “alternate payee” (typically, the participant’s spouse).
o The name and account number of each retirement account involved.
o The percentage (or dollar amount) of each plan that is to be paid to the alternate payee.
o The period of time or the number of payments covered by the QDRO.
The QDRO must be a part of the divorce decree or a court-approved property settlement document. The decree should also specify that a QDRO is being established under Section 414(p) of the Internal Revenue Code (IRC) and the particular state’s domestic relations laws. Intent to establish a QDRO is insufficient; it must be spelled out in the divorce papers.
Getting divorced can be “taxing” enough, but it need not be made more difficult by mish andling the division of assets in a retirement plan. And, although this particular decision does appear to provide room for straying from the precise wording of the statute, applying the proper language in a divorce decree may help ease some of the inevitable complications that can arise, facilitating a smoother transition for all involved. Qualified legal advice should be obtained to help ensure that any desired planning actions are worded and structured properly.
This article appears courtesy of [Reps full name]. [Reps first name] is a Registered Representative offering securities through MetLife Securities, Inc.(MSI) (member FINRA/SIPC), New York, NY 10166. Insurance and annuities offered through Metropolitan Life Insurance Company (MLIC), New York, NY 10166. MSI and MLIC are MetLife companies. [He/She] focuses on meeting the individual insurance and financial services needs of people [in/from] [name occupation/profession/business/or lifestyle market]. You can reach [rep first name] at the office at [registered branch office address and phone number, including area code]. MetLife does not provide tax or legal advice.
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This article appears courtesy of Karl Susman. Karl Susman is a representative of the New Engl and Life Insurance Company. He focuses on meeting the individual insurance and financial services needs of people on the West Coast. You can reach Karl at the office at (424) 785-4337. New Engl and Life Insurance Company, 501 Boylston Street, Boston, MA 02116
