Why you want to Complete your Divorce with the QDRO
Upon your divorce you may be required to divide retirement accounts and in order to do so a QDRO or Qualified Domestic Relations Order is often needed to create the division. This is a legal document, a professional will create, that will be sent to the financial institution that holds the retirement account and allows them to create two accounts from one. This is required because a retirement account can only have one name listed as the owner, so in order for the account to be divided a QDRO is necessary.
Retirement accounts include: 401(k), 403(b), IRA, Roth IRA, Roth 401(k), Roth 403(b), SEP, SIMPLE, Solo 401(k), TSP (Thrift Savings Plan), Pensions and 457(b). By the way, all of the letters and numbers are just the names from the tax code.
Once you have finalized your divorce this tends to be a final piece of business that gets forgotten and is often left incomplete, sometimes for years. Here is why you don’t want to let that happen, the valuation date.
The valuation date is the time/date stamp on the amount you will receive or keep, from the retirement account. This is a value that is assigned during the divorce proceedings and typically all accounts are valued on the same month. Since a divorce is not completed in a week, a month or some times a year you have to choose a date to use the value all of your assets. Most retirement assets are invested in stocks and bonds, and the markets go up and down. If you wait two years to complete your QDRO you may be giving up more than your agreed upon portion or you may not be receiving the gains from your portion.
Let’s use an example here, a 401(k) has a value of $100,000, for easy math. The divorce decree states that you are each to receive, $50,000 per person. The account is in your name and you wait two years to complete the QDRO and the market is down by 20%, your former spouse will not be realizing any of the loss because the dollar amount has been set. You will be taking the full 20% loss.
On the other side, the market has appreciated and is up 20%, you may not receive the gains. This may be beneficial to you depending on the direction of the market and which side you are on. But the reality is that it is far better to be in complete control of you finances and not be at the mercy of the unknown.
So, make it part of the final business that has to be completed and you will not have this lingering and adding additional ties to your former spouse.