Saving for retirement is supposed to provide you with security in your later years. But what happens if your retirement plan becomes a burden instead of a blessing?
Some people find that their retirement plan restricts their options. However, a fairly new application of a federal law is opening avenues for married couples.
A Qualified Domestic Relations Order (QDRO) is an order of a state court to transfer an ERISA account, such as a 401(k), from the spouse who is the “participant” in the plan to the other spouse without paying taxes on the transfer.
A QDRO has many applications. Imagine that you are 70 years old and will have to take Required Minimum Distributions (RMDs) from your 401(k) in the next year, but you are still working and the RMDs may increase your tax burden while diminishing the nest egg you will rely on when you retire. If you have a younger spouse (especially a spouse at least ten years younger than you), you can transfer your 401(k) and possibly delay the Required Beginning Date (RBD) of RMDs.
Alternately, suppose you are 55 and you need to access the funds in your 401(k) to deal with a financial emergency. Withdrawing before age 59 ½ will typically result in a ten percent penalty. However, if you transfer your retirement plan to your spouse (older than 59 ½) you may be able to access those funds penalty-free.
A QDRO could also help with long-term planning for Medicaid. Imagine that your spouse (the plan participant) develops a debilitating disease and will require nursing home care, but your income will not cover the costs. To apply for Medicaid, your spouse must have no more than $2,313 per month in income and must pay that income (minus certain deductions) to the nursing home. By contrast you, as the well spouse, have no income limit and do not have to pay over your income to the nursing home. A QDRO could make your spouse’s 401(k) income your income and allow you to use it to support your household, instead of losing it to the nursing home.
Finally, a QDRO could help you increase your investment options. If your 401(k) limits your options and you would like to diversify your portfolio, you can transfer all or part of the individual retirement account to your spouse. Your spouse can then roll over the account into whatever qualified investment you choose.
Additional applications of a QDRO:
• ROTH Conversion
• Charitable contribution
• Creation and funding of self-directed IRA
• Creation of guaranteed annuity stream of income
A QDRO may help you enjoy the maximum benefit from your retirement savings without adverse tax consequences or penalties.
If you are interested in finding out how a QDRO could help you in your personal situation, please contact a qualified estate planning attorney and set up an appointment to review your options.
Barid and Smith are co-founders of Savannah-based law firm Smith Barid LLC. They can be reached at 912-352-3999, firstname.lastname@example.org or email@example.com.