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Do You Really Need a QDRO?

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You’re in the last steps of your divorce, you can see the light at the end of the tunnel and you’ve reached a settlement agreement with your spouse. Then your mediator or attorney turns to you and says, “Now we just need your QDRO, and that’s going to be an additional fee.” “Wait, why? What is a QDRO, and do I absolutely need it?”

The QDRO is the final step in your divorce, one you can’t skip because most divorces will ultimately involve a QDRO. QDRO is an acronym for a legal document called a Qualified Domestic Relations Order and is required whenever a divorcing couple needs to divide a Qualified Retirement Account.

A Qualified Plan is usually one being held by an employer and includes 401(k) plans, 403(b) plans, pensions, 457 plans, deferred compensation plans, and some RSU, restricted stock unit accounts.

IRAs or, Individual Retirement Accounts do not require a QDRO. However you can use a QDRO to avoid withdrawal penalties, even with an IRA, during a divorce. Legally, the divorce decree is all you need for an IRA division. For a Qualified Retirement Account however, to assign all or a portion of the accounts to a non-employee spouse, it has to be stated in the divorce decree and the QDRO, must be completed and submitted to the plan for the division to take place.

If you are granted retirement assets from a former spouse via QDRO, this is the only opportunity to take money out of that plan with zero penalties. It will be taxable income and there will be no 10% penalty for the withdrawal before age 59 ½. If you want to be able to do this from an IRA, then you must use a QDRO.
In my practice, I facilitate the preparation of QDROs for my clients by acting as their representative to a QDRO attorney that I have vetted and found to be the most affordable and ethical. Through this practice I have become aware of the multitudes of pitfalls that QDROs present and often, the failure of attorneys and mediators to address the issues in the settlement negotiations. Here is just a short list of some of the subtleties often overlooked.

    • Is the non-employee spouse eligible to receive a lump sum settlement upon retirement?
    • If the employee spouse dies, will the non-employee spouse still receive benefits?
    • Were any outstanding loan balances taken into consideration?
    • If splitting a 401(k), what is the actual date of division? Will the earnings after that date be included?
    • For Pensions, does the plan set up a separate account for the non-employee spouse so they can choose their own payout options and beneficiaries? If not, have you protected the non-employee spouse from early-retirement penalties?

As you can see, the waters of a QDRO are fraught with peril and not for the inexperienced! If that wasn’t bad enough, prices for QDROs can range from $500 to $3,000, all for the exact same document. Each plan is unique and has very specific requirements for the language of their QDROs and it is essential that the preparer have the plan documents in advance to ensure it will meet the requirements. You want to ensure that the QDRO will be PRE-APPROVED by the plan if allowed to prevent rejection and more cost to re-do it correctly.

Once your decree is final, signed by the Judge, then you submit the finished QDRO to the Judge as well. Once it is signed, then and only then is it ready to submit to the plan. At that point, they will contact the non-employee spouse to get instructions for the disbursement or to identify the new account set up on their behalf.
QDROs are complicated. Be sure you have an expert that can guide you through it and make sure you don’t get taken advantage of. It just isn’t necessary to go through more pain and frustration.

If you need an affordable, accurate QDRO, contact us today. We’re here to help.

 

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Three Ways to Keep Divorce from Wrecking Your Retirement

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While retirement might not be in the forefront of your mind during a divorce, it’s something that needs to be considered, especially if your facing a “gray divorce.” Divorce can have a profound impact on your retirement savings and financial future. Depending on the circumstances of your split, you may see your retirement prospects change dramatically.

So, how do you keep a divorce from wrecking your retirement? TruNorth Divorce has put together a list of three things to best protect your retirement.

1. Work with the right divorce professional

Work with a Certified Divorce Financial Analyst (CDFA®) or a CDFA®-Mediator. CDFA®’s are experts at divorce finance and know how to preserve your retirement. They understand how taxes work with various kinds of assets and how to value a pension. They can predict the tax consequences of transfers between spouses, and help to ensure your retirement moneys will be properly transferred between spouses.

Lawyers do not have this expertise! At TruNorth Divorce our mediators and advocates are not just expert mediators, they are also CDFA’s and trained divorce coaches. The law is typically a non-issue in most divorces—most divorces don’t need to be processed through the legal system. Your settlement agreement, custody agreement, and divorce filings will always be legally compliant and the quality of your divorce far better when you work with TruNorth Divorce than if you work with an attorney alone.

2. Consider the tax implications of your settlement agreement

Not all assets are treated the same by the IRS. Equity in a house isn’t taxed up to $250,000 per spouse (assuming there are no other prior real estate rollovers pre-1997). Withdrawals from an IRA are taxed at your marginal tax rate. Big difference. Likewise, joint funds in brokerage accounts can be subject to capital gains taxes.

Also, the division of retirement account assets during a divorce, specifically, can have unique tax implications and governing regulations. It’s important to look at the particulars of each account and determine its actual after-tax value. A Roth IRA with $50,000 sitting in it is worth more than a 401(k) with the same amount of money. A pension distribution of $50,000, too, will be treated differently tax-wise.

3. Make sure you have a properly executed Qualified Domestic Relations Order (QDRO)

The Employee Retirement Income Security Act of 1974 protects retirement assets in 401(k), 403(b), and Thrift Savings Plans for federal employees and military personnel. For these plans, you will need to draft a qualified domestic relations order (QDRO) so that the asset split becomes legal and for retirement plan administrators to accept and execute it.

A QDRO endorsed by a judge and executed properly provides a means to roll over a portion of a qualified retirement plan without penalty, tax-free. Depending on the circumstances, you may choose to continue contributing to the retirement plan. You could also roll it over into a Roth IRA through a trustee transfer. You can even take penalty-free withdrawals from transferred qualified retirement plans when they are handled within a QDRO—very helpful if you need some extra cash for a house down payment or to retire debt. Without a well-drafted QDRO you could wait years for your retirement account transfer.

Taking the proper steps to accurately assess your retirement assets during a divorce will put the right financial foot forward as you wipe the slate clean and retake sole ownership of your assets. For more post-divorce budgeting tips and all topics divorce, visit our blogsite.

Reach out to a divorce mediator in Maryland if you want a kinder, smarter, and more affordable divorce. If you’re on the fence and you have a list of concerns related to your divorce, don’t hesitate to Schedule a Free Strategy Session to go over your options. 

 

 

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Three Critical Financial Steps in Getting Through Your Divorce

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Divorce can make it really hard to think straight about what to do next when it comes to most things and especially financial planning. Believe me, I know. The intelligent, together person you are can turn into an emotional, brain-fogged, unorganized mess. You try really, really hard to keep it together but you know this will not go down as “the best of times.” You want to sit down and get it together and plan your future but feel paralyzed and surrounded by a pea-soup cloud of indecision. What’s a person to do to ensure they’re doing the right things to financially plan for your divorce?

Well first, let’s get real.

ADMIT WHAT YOU DON’T KNOW

When it comes to the finances, what’s your role? Do you handle the family’s finances and investments? Are you on top of your investment accounts, retirement plans, bank accounts, etc.? If you’re in the dark, you need someone to help you turn the lights on and fast!  Gather all your financial statements on your asset accounts and your most recent tax returns, then find a specialized divorce financial advisor to help you out and bring you up to speed.  A CDFA is specially trained in the financial aspects of divorce and will be your best friend in this process. If you and your spouse are able to cooperate, you can use a CDFA-Mediator who will educate you and your spouse on the realities of your financial health and what your future might look like under various settlement options.

START ENVISIONING YOUR FUTURE

Maybe you’ve already been fantasizing about your future life or perhaps this has all taken you by surprise. Regardless, it’s time to start really thinking about what the next phase of your life looks like. Unfortunately, this has to happen at the same time that you are grieving what you thought the next phase might look like. But if you allow yourself some space, it can actually be very productive. You now have the chance to start from scratch. What did you used to dream of doing that got lost while you were married? Is it time to go back to school? Maybe live on a sailboat for awhile or move closer to family? Whatever you dream of, you have to have your budget and financial picture top of mind. So the step above has to come first so your dreams don’t outsize your wallet! A financial advisor specializing in divorce would know how to set you up for future success.

BUILD A SINGLE IDENTITY

Often through marriage many of the credit cards, mortgages, loans, etc. are in the names of both spouses. All of those accounts will have to be closed or converted. After the marriage is over, your credit picture may not be nearly as strong, so you want to be sure to put some things in place while you’re still married. Immediately open a checking and savings account in your own name to begin the process of establishing your own financial identity. Get a credit report and start monitoring it. Track your expenses and create a budget for now and post-divorce. Find a good rewards credit card to apply for in your name alone so that you will be assured of having access to credit through the divorce and beyond.  

These steps seem small but are valuable first steps to get you thinking financially and looking out for your future. You can get through this with a little help from an experienced divorce financial advisor. Having the right professionals on your side will be of great benefit to you.

 

 

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How is Alimony in Pennsylvania Determined?

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Alimony in Pennsylvania is but one financial aspect of divorce. There are many which you should have a qualified divorce financial professional review. 

Alimony is a generic term that actually refers to three types of support payments. They are made by the higher earning spouse to the lesser earning spouse:

  • Spousal Support – Awarded to the lesser earning spouse. This is pre-divorce and before either party files a divorce complaint. Can be awarded even if the parties are living in the same house so long as they are separated, i.e., living separate and apart.
  • Alimony Pendente Lite – Support after the divorce complaint is filed and before the divorce is final.
  • Alimony – Payments made once the divorce is finalized for a set period of time per the divorce settlement.

Spousal support and alimony pendente lite are calculated in the same way. Alimony in Pennsylvania is determined by a number of factors but it is often calculated with the same formula.

Basic Calculations

No Minor Children: Spousal support and alimony pendente lite is calculated before child support. It is based on net income. If there are no children, the amount is the difference between 33% of the obligor’s (higher earning spouse’s) and 40% of the obligee’s (lower earning spouse’s) net income. For example,

Obligor’s Monthly Net Income is $15,000; 33% is $5,000

Obligee’s Monthly Net Income is $10,000; 40% is $4,000

Difference = $1000 = Monthly Support

With Minor Children: The same basic formula but the percentages are changed to 25% and 30%, respectively. To illustrate,

Obligor’s Monthly Net Income is $15,000; 25% is $3,750

Obligee’s Monthly Net Income is $10,000; 30% is $3,000

Difference = $750 = Monthly Support

Additionally, there will be a separate amount calculated for child support that will be added to the monthly alimony.

Post-Divorce Alimony Considerations

Many courts use the formulas above. These amount may be modified based on a number of factors, the most important of which are:

  • Difference between spouses’ earnings
  • Ages and health of the parties
  • Sources of income
  • Expectancies, e.g., inheritances
  • Financial needs of the parties
  • Marital misconduct (rarely considered)

Duration of Post-Divorce Alimony

How long alimony will be paid is a discretionary decision that is based on the factors above. The rule of thumb, though, is 1 year for every 3 years of marriage. So, if a couple has been married for 20 years, the lesser earning spouse would expect to receive alimony for 6 – 7 years. If, however, if the lesser earning spouse is near retirement at the end of that period, the court may extend until he or she is able to collect Social Security and/or access retirement funds.

Alimony Buyouts

The vast majority of men and women view alimony with disdain. Who wants to have to write a check to their ex-spouse month after month? Likewise, does anyone like waiting for and worrying about the monthly check they’re expecting from their ex? What happens if the payor dies, loses their job, or becomes disabled? Is he or she going to be obsessing about whether their ex is cohabitating with a new partner? One alternative is to add an offset to the distribution of the assets equal to the present value of the expected alimony payments. So long as there are sufficient assets to cover the amount, this is a win-win for both parties and eliminates the ongoing angst of monthly payments.

Read more on divorce financial considerations here. Alimony in Pennsylvania It can be a messy affair and a CDFA, like those at TruNorth Divorce Solutions, can help you sort out the details.

 

 

 

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How is Child Support in Pennsylvania Determined?

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Note: This article has been updated with the Pennsylvania child support guidelines that took effect on January 1, 2022.

Of the many financial considerations in divorce that a couple must address is “how much child support?” Child support in Pennsylvania (and 36 other states) is centered on the Income Shares Model, which is based on the concept that children should receive the same proportion of parental income that they would have received if the parents lived together. That amount is found to be related to the level of household income and the number of children for food, housing, transportation, clothing, $250 in annual  medical expenses for each child, and miscellaneous items that are needed and provided for by their parents. This amount is expressed by the child support guidelines.

These guidelines may be adjusted by the court based on additional information regarding special needs and obligations, e.g., private schooling or extraordinary medical expenses. In fact, there are many complexities in child support. Nonetheless, child support begins with monthly net income. The current schedule for monthly child support in Pennsylvania for up to $30,000 combined monthly net income can be found here.

If monthly combined net income is above $30,000 the amount may be increased based on how much it costs to maintain whatever lifestyle the child has become accustomed to without burdening the custodial parent. Generally, when combined monthly parental income exceeds $30,000 (after deductions), the court orders parents to pay the highest basic support obligation for their number of children, plus a percentage of the amount over $30,000.

  • One child: $3,608 plus 4.0 percent of the combined monthly parental income over $30,000
  • Two children: $4,250 plus 4.0 percent
  • Three children: $4,951 plus 4.7 percent
  • Four children: $5,530 plus 5.3 percent
  • Five children: $6,083 plus 5.8 percent
  • Six children: $6,613 plus 6.3 percent

Parents’ Individual Payments. Child support in Pennsylvania is paid to the custodial parent. If shared custody, support is paid by the parent with the higher net income. When the parents share custody such that the support-paying parent has more than 40% of overnights with the children, a reduction is made accordingly.

Earning capacity may be considered if higher than actual income. Each parent’s contribution takes into account a “self-support reserve” that represents the poverty level of one person as well as an assumption that the children will spend up to 40% of their time with the support-paying (aka “obligor”) parent.

Net Income. Net income is based on a six month average of a party’s income and includes income from any source, including employee wages, businesses owned, pensions and other retirement, estates and trust, social security, tax refunds, awards and verdicts, and alimony that is intended to finance the support-receiving parent (aka “obligee”). Gross income is reduced by mandatory payments, e.g., taxes, FICA, and union dues but not discretionary deductions, e.g., retirement contributions. It may be further lessened by alimony paid to a former spouse or child support for other children of the obligor parent.

Basic Child Support Calculation

The basic child support calculation is determined by

  1. The child support guidelines that take into account the parents’ combined net income and the number of children (see the PA Child Support Guidelines)
  2. The parents’ respective percentages of net income
  3. Adjustments for shared custody
  4. Additional expenses, e.g., child care, health insurance, medical over $250 per child
  5. Other adjustments, e.g., alimony, other children, extraordinary medical expenses, a new spouse’s income. A basic calculator can be found here.

Example Calculations

Example 1: Basic Calculation. Consider the hypothetical case of Keith and Audrey. Keith is the primary physical custodian of their child and has a monthly income of $2,500 after deductions. Audrey has a monthly income of $3,500 after deductions.

Keith and Audrey add their monthly net incomes together to get $6,000. The basic child suppport obligation for one child is $1,172.

Keith divides his monthly earnings of $2,500 by $6,000 to get 0.4167, meaning he earns 41.67 percent of the combined income. Audrey divides her earnings of $3,500 by $6,000 to get 0.5833, or 58.33 percent.

Audrey, the parent with partial physical custody, multiplies $1,172 by 0.5833 to find she must pay Keith $684 per month.

Example 2: Shared Custody. Audrey spends three days a week with the kids (40 percent of parenting time), she does not qualify for a reduction. However, If she spends 50% of yearly overnights with the children, she will qualify for a reduction: She takes her portion of the combined monthly income, 58.33 percent (from Step 3) and decreases it by 20 percent to get 38.33 percent. She multiplies the new percentage by the combined basic support obligation from Step 4 to get her reduced amount: $449 (.3833 X $1,172).

Example 3: Low Income. For low income situations, the guidelines ensure that parents have a minimum amount of income on which to live. Consider Paul, who has a monthly net income of $1,500 and must pay support for two children. The support schedule shows the obligation based on his income alone and number of children is $352 due to his low income status.

If the other parent has a monthly net income of $2,500, that will make their their combined monthly parental income $4,000. According to the chart, their combined obligation is $1,340. With 38 percent of the income (see Step 2 for calculation instruction), Paul’s individual obligation would be $509 per the guideline formula.

Paul, though, will pay $352 per month in support, the lesser of the two results.

Example 4: High Income. Fern and Roger have two children and a combined monthly income of $35,000. They find the highest support obligation on the schedule for their number of children is $4,250.

Next, they multiply $5,000, the amount over $30,000, by .4 (4%) to get $200.

They add $200 to $4,250 to determine their adjusted combined support obligation is $4,500.

To calculate the amount he must pay as the partial parent, Roger multiplies $4,500 by his percentage of the monthly income, which is 52 percent (see Step 3). Roger owes Fern $2,250 monthly (4,500 X 0.52) before deviations for shared custody and other expenses.

Do you want to learn more on important financial considerations during divorce? Download our complimentary divorce financial planning guide.

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