During a Michigan divorce, spouses must divide their shared property and debts. How they split their resources and financial obligations depends in part on the circumstances of their marriage. Michigan has an equitable distribution statute that requires a fair settlement, which leaves much open to the interpretation of spouses or the judge hearing a litigated property division case.
Couples may have set money aside for retirement during the marriage. If they use tax-deferred retirement savings accounts, such as 401(k)s, they may worry about secondary losses they could incur in addition to losing part of the account balance in the property division settlement.
Spouses may need to work with an attorney to draft a Qualified Domestic Relations Order (QDRO) if their property division settlement mandates the division of a 401(k) or similar account.
What are the potential risks?
Spouses generally need to address the amount of retirement savings accrued during the marriage, even if only one spouse has their name on the account. They can use the account balance to offset other property division terms. They can also agree to split the account in a specific manner. A judge could also order the division of retirement savings accounts in a litigated case.
When dividing the account is necessary, spouses may be at risk of income tax consequences. They typically need to report the amount withdrawn as income, which could push them into a higher tax bracket and leave them with a bill due when they file their annual return. They may also be responsible for covering a 10% penalty calculated based on the amount withdrawn from the account.
How does a QDRO help?
When properly drafted and filed with the right parties, a QDRO facilitates a penalty-free division of a retirement savings account or pension. An attorney drafts the QDRO after the courts approve a final property division decree.
The terms included in the QDRO must mirror the arrangements for the account outlined in the property division order. Both spouses must sign the QDRO. They must submit the document to the courts for review and approval.
Finally, the document goes to the business or professional managing the account. The QDRO orders the withdrawal of a specific percentage of the account balance, which then becomes funding for a new account in the name of the recipient spouse. If neither spouse makes a pre-retirement withdrawal after submitting the QDRO and splitting the account, the spouses do not need to worry about income tax consequences or penalties.
An attorney’s assistance is important when addressing high-value resources and taking steps to avoid financial complications during a divorce, given all that is at stake. Working with a lawyer makes it easier to address retirement accounts and avoid secondary financial consequences during a Michigan divorce.