Alternate Payee Must Stay Involved or May Lose
The Alternate Payee, who is the former spouse receiving the new QDRO account, must
stay involved in the QDRO process all the way through the plan administrator's set up of the new
QDRO account. The Alternate Payee cannot depend on the retirement plan Participant to get this
Many plan participants are cooperative in getting the QDRO completed. However
many will delay the process and especially if a lot of time has passed since the date of the Decree,
many will assume that if they are uncooperative, they may keep their retirement plan intact if the
QDRO is never completed.
Sometimes that works.
Thus, the Alternate Payee has to stay involved in order to protect his or her right to get the QDRO completed and processed.
Don't Delay Getting the QDRO Done, or May Lose
The best time to get the QDRO done is before the Decree is signed. That may not be a
real comfortable time in the relationship between the spouses, however, as time goes on, the
relationship will sour, thus making the QDRO more difficult to get completed.
Particularly if months have passed since the date of the Decree, the Participant is less likely to be cooperative.
And if years have passed since the date of the Decree, some QDROs will never be completed and processed. One reason is the lack of cooperation. Another reason is that many
times 401(k), 403(b) and similar retirement benefits have already been withdrawn and are no
longer available. And if the retirement plan is a pension plan, the Participant may have entered
pay status, thereby precluding the completion of a separate interest QDRO.
So, get going on your QDRO ASAP, or you may lose, as many do.
Don't Pay the 10% Early Withdrawal Penalty by Rolling It Into an IRA Before a Withdrawal
Many Alternate Payees who are under age 59 and a half make the mistake of having to
pay a 10% early withdrawal penalty because they improperly roll the QDRO account money into
an IRA before they take the cash withdrawal.
They fail to take advantage of the IRS exemption form the early withdrawal penalty that is provided to an Alternate Payee who takes a cash withdrawal from a QDRO account.
The cash withdrawal from a QDRO account is taxed at the Alternate Payee's marginal
income tax rate. For example, if he or she is earning $50,000/year, the marginal federal income
tax rate is 25%. Then you must add Colorado's 4.63% income tax rate, for a total big tax bite of
29.63%. So, on a $10,000 cash withdrawal, you pay $3,000, in round numbers, income tax.
If you incur mistakenly incur the early withdrawal penalty, then you pay another
$1,000, for a total tax bite of $4,000.
And there is never an exemption from this penalty for a withdrawal from an IRA.
So, pay attention to structuring your transaction so that you avoid the 10% early
Calculate Your income taxes before you decide to withdraw cash, including Colorado tax
I discussed the income tax calculation in the preceding topic discussion regarding the early withdrawal penalty. The
Alternate Payee is taxed at his or her marginal income tax rate. It is likely a minimum of 30%
for most people. Review the previous topic.
Don't hire a "Financial Planner"; Stay way from an Annuity & Other Insurance"investments'
There are multiple reasons that the Alternate Payee should stay away from
commissioned sales people who label themselves as financial planners, certified divorce coaches,
certified divorce financial analysts, and so forth.
They will make money with their high
commissions and you will lose money.
The same advice applies to a plan Participant who terminates employment and then
starts looking for ways to move the plan money away from the retirement plan record keeper.
One big mistake is that the financial planner will influence the
Alternate Payee or Participant if the Participant is no longer employed by the plan sponsor is roll
the plan money into an IRA. The reason is that the salesman cannot earn commissions on money
that is held inside a retirement plan account. But the salesman will earn commissions if the
money is rolled into an IRA. But again, if the Alternate Payee is going to take a cash withdrawal
and under age 59 and a half, don't roll the money into a IRA first. That is the advice the
financial planner will provide so that the salesman will earn commissions. There are additional reasons to avoid these commissioned sales people. One reason is that annuities and other life insurance products are not investments which will provide any rate of return for you. Believe me, keep your money. Stay away from the financial product sales people.
Don't pay hourly fees to do the QDRO or Argue about it
Almost all attorneys who are representing clients in divorce cases want to get the
QDRO done as efficiently as possible. Most of the time both spouses and the attorneys who represent them are emotionally
worn out by the time the separation agreement is signed or the permanent orders hearing is
concluded. And most spouses are financially drained out at that point in time. Most want to get the QDRO done as quickly and inexpensively as possible.
But, there are some attorneys who want to continue disputing everything, if they are
able to successfully continue billing hourly fees.
I suggest that you don't pay attorneys to prepare QDROs using hourly fees.
Instead, use a fixed fee QDRO attorney.
suggest that you don't pay attorneys to continue to argue about the specifics of the QDRO, unless
there is bona fide misunderstanding. A QDRO can be somewhat complicated, but the objective and the final result is not a
complicated issue. Where you end up is not something that is obscure and subject to argument. Usually a QDRO is fairly straightforward, as long as any retirement plan loans are
identified and there is an understanding as to whether the Alternate Payee will be debited for any
such loans. As to the issue of the application of earnings and losses, Colorado law is clear, both
statute and higher court cases provide that they are to be allocated as of the date of the Decree,
unless the parties agree to something different. So, don't waste your money trying to re-invent the wheel or arguing about it.
Don't pay money for the pension valuation scam
I first became aware of a pension valuation scam in 2014. In 2015 it really picked up
steam. And it continues now in 2016. Last month, in July 2016 I had another couple come into
my office where they were working on pension valuations. They were totally misled. We got
that straightened out.
The scam is that you are being told by attorneys and non-attorney mediators ( who are
not licensed to give you any legal advice anyway) that you must purchase a pension valuation
when you get a divorce in Colorado.
That is absolutely false and it makes no sense. The law in Colorado is very clear on this.
And the proposed pension valuations are extremely incorrect.
See my separate web page on the pension valuation scam.