American Express, a credit card company, has halted contributions to employees’ retirement plans in the United States and the UK. The move is part of a restructuring effort to slash costs amid mounting credit losses.
If you’re divorced and your ex-spouse is an employee of American Express, your spouse may have a right to some or all of the assets in the company’s retirement plan. Using a QDRO, a judge can award all or some of the plan’s benefits to your spouse.
What is a QDRO?
A QDRO is a legal order that tells the plan administrator how to distribute the benefits of a retirement account. In many cases, this is required for a divorce to be finalized.
A judge has the ability to award all of the pension to one spouse, or split it equally (50/50). Alternatively, a spouse can trade the assets for something else, like a house.
Another advantage of a QDRO is that it does not subject a payout to the 10 percent early withdrawal penalty, which would normally apply to a non-retirement plan distribution.
Divorced spouses may find it difficult to deal with retirement assets, as they can be a significant part of a property division. Therefore, a spouse should consider obtaining the services of a lawyer who has experience with this type of case. This can help prevent some of the common missteps that occur. It can also help the couple settle their property issues quickly and efficiently, which saves them time and money.
Can a QDRO be used to divide a QDRO-eligible retirement account?
A QDRO can be used to divide a retirement account that is QDRO-eligible, meaning the plan has been set up to accept a court order or settlement agreement. The QDRO must be tailored to meet the specific rules and distribution options of the retirement plan.
A retirement plan may be one of the most valuable marital assets, and judges have many choices when deciding how to divide it. Among them are awarding all of the pension to the working spouse or splitting it equally (50/50).
The amount you receive from your ex-spouse’s retirement account will depend on how the QDRO is written, and on whether or not you qualify as an alternate payee under the plan. If you are, you may be able to take your portion in a lump sum or in installments, and your benefit will be tax-deferred.
What are the tax implications of a QDRO?
If you’re divorced and your former spouse’s retirement plan is divided, you need to know the tax implications. Withdrawals from retirement accounts often qualify as taxable income, and they can trigger early withdrawal penalties for those under the age of 59 1/2.
In addition, if you receive a distribution from your ex-spouse’s retirement account after a divorce and you don’t have a QDRO, the funds are taxable to you rather than to the ex-spouse. Furthermore, if you are below the age of 59 1/2 and take an early distribution from your ex-spouse’s account, you may be subject to a 10% penalty.
The best way to avoid these pitfalls is to make sure that your divorce settlement includes provisions for dividing your spouse’s retirement assets. However, it can be difficult to accomplish this. That’s why it’s critical to retain an attorney who can help you navigate these issues.
What are the benefits of a QDRO?
A QDRO allows a plan participant to divide a retirement account (including 401(k)s and 403bs) between a spouse or ex-spouse. This is a vital option for divorcing spouses who wish to distribute their assets in a way that would otherwise be too difficult or costly.
A benefit of a QDRO is that it prevents the 10% early withdrawal penalty from applying to any funds transferred under the order. This is a tax-sheltering advantage that can be critical in situations where a former spouse is years away from retirement age.
A QDRO must comply with both the Employee Retirement Income Security Act (ERISA) and the domestic relations laws in the state that has jurisdiction over the case. It may provide for marital property division, alimony or child support payments. It must also comply with the ERISA definition of “alternate payee.” This person, most often a spouse, is granted the right to receive part of the retirement benefits earned by a plan participant.