A Qualified Domestic Relations Order (“QDRO”) is typically used during a divorce to divide assets between couples from a qualified account(s), such as a 401(k), without triggering a tax penalty. Although this Federal law was created to help simplify divorce proceedings, it does not limit the law to divorce. An “In-Marriage QDRO” is now being used in multiple jurisdictions throughout the United States.
It allows married spouses to contract between themselves using the benefits of federal QDRO law. The In-Marriage QDRO or (IMQ) offers couples an additional qualifying event that they can plan and control, giving them a variety of beneficial uses in their estate plan.
Here are a few common uses of the In-Marriage QDRO.
Avoid Early Withdrawal Penalty
A younger participant spouse can use the In-Marriage QDRO to transfer a portion of their 401(k) to a spouse that is over the age 59 ½. This way the 10% early withdrawal penalty is avoided. This allows couples to access funds if needed without penalty.
Delay Required Minimum Distributions (RMDs)
A participant spouse that turns 70 years before the younger spouse can roll retirement funds over to the younger spouse. This will delay the implementation of required minimum distributions. This strategy must be discussed with a financial advisor in advance to avoid rolling over a 401(k) and/or pension into an IRA for managed diversification at retirement.
Improve Medicaid and Long-Term Care Costs
Should one spouse fall ill and need the assistance of nursing home care, an appropriately crafted In-Marriage QDRO can protect 100% of a pension by transferring the benefit to the spouse remaining at home.
The use of In-Marriage QDRO is relatively new. Although the foundations for the strategy has laid dormant for over 30 years. When navigating the use of an In-Marriage QDRO use caution. Know the risks and consult with the necessary professionals to help you create a sound plan.