Contributed by: Jacki Roessler, CDFA®
I always enjoy talking with former clients after their divorces, but as soon as I heard Margo’s voice on the phone, I knew she was upset. She and her ex-husband, Jim, had divorced nine months ago. Margo shared the frustration that her finances remained tied to Jim’s. The biggest hold-up: receiving her share of retirement assets.
Why was it taking so long? Would the delay have any negative consequences for her? What, if anything, could she do to expedite the process?
For Margo – and anyone in the same position – preparing and implementing the Qualified Domestic Relations Orders (QDROs for short) may delay the process. These legal documents transfer qualified retirement account assets (i.e. 401ks, pensions, etc) after a divorce.
Because the QDRO is complicated, divorce attorneys often refer drafting to outside experts. A preparer typically takes between three and four weeks to draft the QDRO. The draft must be reviewed and approved by both attorneys, signed by all the parties and then submitted to the Judge. It can then take a week to three months to contact the parties with an approval notice or a list of required changes. After notice is received, the plan administrator generally enforces a 30-day hold for either party to object.
Even if every step goes smoothly, three or four months is a reasonable timeframe. So I first advised Margo to adjust her expectations.
Should she worry about how this delay will affect her finances? If it happens over a market downturn, is Margo entitled to her 50% share of the 401k on the date of divorce or the amount her share is currently worth, which is $25,000 less? Margo didn’t have any input on investment choices while the QDRO was pending, so she believes she shouldn’t have to share in the short-term investment loss.
Even more worrisome, if Jim were to die, remarry, or retire before the QDRO is approved, she could end up with nothing but the option to take him back to court – or even worse, file a claim against his estate.
Margo can take some proactive steps to speed up this process. First and foremost, she has to be her own advocate and contact her attorney and the preparer about the reason for the delay. Whatever the problem, Margo needs to take an active role in solving it. She can also discuss liquidating her share of the retirement assets (inside the account) while the QDRO is pending, to avoid any market loss. While that’s the safest route, she also risks losing a short-term market gain.
As always, whenever you have financial questions, post-divorce, contact your attorney and/or financial expert to see whether you need assistance.
Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.
Raymond James and its advisors do not offer legal advice. You should discuss any legal matters with the appropriate professional.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
This is a hypothetical example for illustration purpose only and does not represent an actual investment.
A QDRO - Qualified Domestic Relations Order - is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant.