What is the fastest way to make hundreds of thousands of dollars disappear? A rollover or cash out of a retirement account. And while most divorce agreements warn the parties to be sure to get to that “QDRO” (Qualified Domestic Relations Order) someday, most people are financially, emotionally, and physically exhausted by the time the divorce is done. And for that reason, the QDRO gets postponed.
What happens when people wait to process a QDRO? If they are lucky, nothing – the records stay intact, nobody takes the funds, and the QDRO can still be drafted. But the longer they wait, the more likely they are to encounter problems, such as the funds being cashed out or rolled over by the employee-participant.
Cashing out means that the participant received a lump sum payment of the retirement plan. We saw this often during the pandemic, when there were exemptions to hardship rules that made it easy to cash out without penalties. Recent divorcees often need immediate cash, and some simply want to seize the funds before the ex gets to them. If you suspect this has happened to a retirement account at issue in your divorce, here are some strategies that might help:
- Draft a QDRO anyway and include language that the plan will provide an accounting of any shortfall if there are insufficient funds in the account to pay what you are owed. By doing this, you’ll ensure that you get as much as possible from the account, plus you’ll have an idea of how much you are still owed, which will be handy if you have to go to court.
- Consider trying to negotiate with your ex-spouse. They may have taken the money out of necessity and be willing to come to an agreement on any shortfall. Even if you have to accept less than you were owed under a QDRO, it may be worth the saved stress and legal expenses to come to an agreement with your ex. Don’t forget to consider taxes – if your ex took the funds out, he or she may have already covered the income taxes, so if you offer them a slight discount on what you are owed to settle things, you may still come out ahead compared to where you’d be if you paid the taxes yourself.
- If you are still owed money and no worthwhile negotiations are happening, consider contacting a family law attorney. They can file a motion in court to get a judgment for the shortfall, plus other remedies such as contempt of court or wage garnishment may be available.
Rolling over means that the participant transferred their retirement plan to another retirement account, such as an IRA or another employer-sponsored plan. This happens often when people change jobs, though some will do it to attempt to hide funds. If this happens, remedies include:
- If your ex-spouse is cooperative, you can get records from the new plan regarding the amount of rollover and provide this to an accountant, financial advisor, or valuation expert and ask them to provide a tracing – a valuation estimate based on the value of the account at the time of divorce, plus what the underlying investments would have done since then to the present day. These financial experts can be costly, so on low-value accounts, it may be preferable to come to a rough agreement on a number.
- If your ex-spouse is uncooperative, you may need to have a family law attorney subpoena the account records, then similarly, you’ll have a financial expert calculate what your share “should have been” and ask a court to order your ex-spouse to pay that amount – either out of pocket or via a QDRO on the new account.
No matter which scenario you face, it becomes an expensive problem when the money is moved. We saw this a lot during the pandemic, when there were expedited hardship withdrawal procedures and exemptions from penalties, leading many cash-strapped participants to empty their accounts. And we also see it when people change jobs and simply roll the funds over to the new employer’s 401(k) plan. Once the money changes hands, the answer usually involves a financial expert tracing the funds and providing an estimate of the present-day value, which is far more expensive than a relatively simple QDRO prepared nearer the time of divorce.
If you’ve been recently divorced and are waiting on a QDRO, consider preparing a QDRO and tying up this loose end on your divorce. We provide a dynamic QDRO generator that allows you to tailor your order to your divorce agreement, lets you preview the documents before you pay, and even provides an editable version in case further edits are needed after you generate your order. Get started with your QDRO today!
