The Nitty-Gritty on Retirement Plan Division with Donna M. Cheswick, CDFA®, CQS

42:16
 
Μοίρασέ το
 

Manage episode 304165702 series 2372562
Από My Divorce Solution ανακαλύφθηκε από την Player FM και την κοινότητά μας - τα πνευματικά δικαιώματα ανήκουν στον εκδότη, όχι στην Player FM και ο ήχος αναπαράγεται απευθείας από τους διακομιστές μας. Πατήστε το κουμπί Εγγραφή για να παρακολουθείτε τις ενημερώσεις στην Player FM ή επικολλήστε το URL feed σε άλλες εφαρμογές podcast.

On the newest episode of We Chat Divorce we’re speaking with Donna M. Cheswick. Donna has over 30 years of experience in the financial services industry. She is a Certified Divorce Financial Analyst (CDFA®) and a Certified QDRO Specialist (CQS). She is the owner of Cheswick Divorce Solutions LLC, located in Southwestern Pennsylvania, where she helps individuals, couples, and family law attorneys with all the financial complexities that arise during divorce to ensure the most financial advantageous settlement possible. Education is the backbone of her business. She frequently teaches workshops on a wide variety of topics relating to finance and divorce, as well as authors numerous articles for local/national print and online publications. Donna also is a trained divorce mediator and a collaborative financial neutral. She has also been drafting QDROs and other like orders for the last ten years.

Learn More >> http://cheswickdivorcesolutions.com/

Connect with Donna Cheswick on LinkedIn >> https://www.linkedin.com/in/donnacheswick/

The We Chat Divorce podcast (hereinafter referred to as the “WCD”) represents the opinions of Shanahan, Chellew, and their guests to the show. WCD should not be considered professional or legal advice. The content here is for informational purposes only. Views and opinions expressed on WCD are our own and do not represent that of our places of work.

WCD should not be used in any legal capacity whatsoever. Listeners should contact their attorney to obtain advice with respect to any particular legal matter. No listener should act or refrain from acting on the basis of information on WCD without first seeking legal advice from counsel in the relevant jurisdiction. No guarantee is given regarding the accuracy of any statements or opinions made on WCD.

Unless specifically stated otherwise, Shanahan and Chellew do not endorse, approve, recommend, or certify any information, product, process, service, or organization presented or mentioned on WCD, and information from this podcast should not be referenced in any way to imply such approval or endorsement. The third-party materials or content of any third-party site referenced on WCD do not necessarily reflect the opinions, standards or policies of Catherine Shanahan or Karen Chellew.

Karen:

Welcome to We Chat Divorce, Catherine and I are so happy today to welcome Donna Cheswick, owner of Cheswick Divorce Solutions LLC. In this episode, we're going to discuss the nitty-gritty on issues with retirement plan division in divorce. But first, let me take a couple minutes to introduce Donna. Donna has over 30 years of experience in the financial services industry. She's a certified divorce financial analyst. You will also hear the term CDFA. She's also a certified QDRO specialist. That term is a CQS. You may have never heard that one. She is the owner of Cheswick Divorce Solutions located in southwestern Pennsylvania, where she helps individuals, couples, and family law attorneys with all the financial complexities that arise during divorce to ensure the most financial advantageous settlement possible.

Education is a backbone of her business and she frequently teaches workshops on a wide variety of topics relating to finance and divorce, as well as authors numerous articles for local national print and online publications. Donna also is a trained divorce mediator and a collaborative financial neutral. She's also been drafting QDROs and other like orders for the last 10 years. Welcome, Donna.

Donna:

Thank you so much. I'm glad to be with you both.

Catherine:

Oh, always love having a fellow CDFA here, which is how we met. So happy to have you here. And I'm really looking forward to getting to the nitty-gritty of retirement accounts with you. I know I'm burning with some questions and I'm sure Karen is as well.

Karen:

Absolutely. And you are a wealth of information to us and our clients. And we're so grateful that we have you on our team live. So Donna, let's just start out with how are retirement accounts split in divorce? Let's talk about that.

Donna:

Well, there are two main classifications as I'd call it of division. You have dividing employer retirement plans and then you have dividing IRAs and other types of qualified plans. And the employer plans require a special document. It's called a qualified domestic relations order. You'll hear the term QDRO or Q-DRO, depending on what part of the country you live in and they both mean the same thing. And that is needed to allow the employer to actually divide an employer plan to an alternate payee.

The other process is basically transfer incident to divorce. When you have say an IRA account, you just need special language in your marital settlement agreement detailing how that transfer is going to occur. Both of these methods are done as a tax-free transfer. Nobody's taking out money from their account, writing a check to their soon to be ex-spouse. Everything can be transferred in a tax-free transfer from one party to the other.

Catherine:

So let's give a couple of examples about that. So, an employer plan would be?

Donna:

PPG, Google, pensions, a municipality - anywhere where you are working for someone else.

Catherine:

But that would be a pension…I'm sorry, that would be a pension, a 401k.

Donna:

Yes.

Catherine:

A 403(b).

Donna:

Yes. 403(b).

Catherine:

Okay. And then the other plans that you're mentioning are just IRAs, Roth IRAs.

Donna:

Correct. Correct.

Karen:

I was just going to say how many times do we see IRAs and Roth IRAs designated in the marital settlement agreement that they need a QDRO? I see it more than I don't see it.

Donna:

They do not. Only employer plans require a QDRO. However, if you put language in your marital settlement agreement that says you're going to divide an IRA by a QDRO, many times the plan administrator will want one because you've put it in your marital settlement agreement because you have to send a copy of the marital settlement agreement along with some paperwork to that IRA custodian. So you need to be careful not to put language in that you don't need because then ultimately-

Karen:

Spending another $500…(laughter)

Catherine:

Yeah. Yeah. That's a really good point because actually I never knew that. So I have an IRA. If you're listening, you have an IRA, your attorney just throws the language in there because they think they should throw the language in there, that plan administrator may require you to execute a QDRO, which is costly.

Donna:

Correct. Correct. Now you can put kind of roundabout language in there that says if the custodian or financial institution requires it, one will be you know what I mean. But if you say this plan will be divided by qualified domestic relations order, likely that plan is going to or that IRA custodian, they're going to be looking then for qualified domestic relations workers. You said you were going to provide one.

Karen:

Right. And they have to follow the order. They have to follow the marital settlement agreements. They don't have a lot of options.

Catherine:

I know you can say this, but Karen, you may recall this, but Donna it's the truth. And really, I wish I made this stuff up, but I don't. We had an attorney that charged a client a couple of hours because he did all this research to find out that her IRA did not need a QDRO.

Karen:

We're not sure what the research was either.

Catherine:

We asked for the research just out of curiosity, but we never received it. But she did receive the bill for it, which is upsetting. You also bring up something else when you mention the pensions meaning defined benefits or defined contributions like your 401k's, you must hear this just as we hear this. A lot of people feel like, well, my employer won't let you have that money. So that money is mine.

Donna:

That is not true. Even if the employer, because there are some plans, some employer plans that cannot be divided with the qualified domestic relations order. They're few and far between but that does not mean they are not marital property. And should be attributed, maybe one party is going to keep that asset, but the other party is not. But yeah, I hear that a lot of times too, my spouse says that's my pension not yours. That's not true. That's marital property. It doesn't matter that it's only in one party's name. If it occurred during the course of the marriage, all or some of it, because maybe there's a premarital component or post-separation component, it's marital.

Catherine:

Mmm-hmm.

Karen:

Yeah. And that means you have a marital interest in it. So while the one spouse or the other may technically own it, the other spouse has an interest when dividing the asset and when dividing the marital property. I think a lot of people are challenged with that concept. Yeah.

Catherine:

Yeah. When we talked about the details you mentioned the marital component and the non-marital component, but it's also really important, isn't it? To have details on what happens if one of the spouse dies before the QDRO is actually approved?

Donna:

Well, that's one reason why you don't want to delay getting these orders done because that's just one possibility that can happen. Now you can do post-death QDROs.

Catherine:

Oh.

Donna:

They can be divided post, not every plan, but any ERISA plan can be, but again, not 20 years from now when they've already distributed the assets, that's the problem that you run into. Say you have a 401k, the party dies, the qualified domestic relations order hasn't been processed. And the plan makes a distribution to whomever those beneficiaries are that the employee has on file and they send the money out. Then what?

Catherine:

Right.

Donna:

Then you may have to go to the estate of the deceased and a whole bunch of other legal issues that can arise.

Catherine:

What happens if you get divorced and there is supposed to be a QDRO and neither party initiate or follows up on the QDRO being processed because they're in their 50s, let's say or 40s and now they want to retire. QDRO was never initiated. Will the company know that one is required?

Donna:

Well, the company doesn't know anything until they're told, right. If the company does not know unless they have that legal document, they may not know. But one can still be prepared. Because I get a lot of attorneys come to me, more recently one from 10 years ago. Nothing was ever prepared and it was a pension and wife or ex-wife knew ex-husband was going to be retiring soon. She calls the company and asks, when am I going to start getting my pension? Well, what did the company tell her? We have no paperwork on file, which they didn't. Nobody did a qualified domestic relations order. I mean you can lose benefits if you…

Karen:

And the surviving spouse could have been changed by then as well.

Donna:

Yes. That's another problem. The party could go into pay status and pick single life expectancy. Meaning it's only going to pay out on that employee's lifetime. God forbid if that employee dies an early death, there's no, even if you get a QDRO submitted, the former spouse payment will die when the employee spouse dies. And that could be problematic.

Catherine:

What if the ex-spouse remarried in that scenario?

Donna:

Pardon?

Catherine:

What if the ex-spouse remarried in that ten-year period but the attorney didn't call you.

Donna:

Well, depends on the plan. But what happens is they may have chosen a joint and survivor benefit with a new spouse. Now that's different while they're living than when they die. Right. So as long as the employee spouse is living, there can still be a division. The court order is submitted for a former spouse, but potentially if that employee spouse dies and they were able to name a second spouse that could be problematic.

Every plan is different, there's different rules. You definitely want check that information out. But I would encourage people do not wait to get these legal documents prepared. They should be done. Actually, they should be done at the point when you're signing your marital settlement agreement in a perfect world or very shortly after the divorce decree.

Karen:

Right. And even asking your council or your attorney to take the steps, to notify the plan administrator that a divorce is pending because usually that'll put a hold on the account until they have further instruction. I know it's only temporary but sometimes that will create a lockdown of sorts until the divorce is completed, especially in these really long divorce scenarios. Yeah, that can be helpful too.

Donna:

Not all plans that will. So be aware. And sometimes it's only for 18 months. So five years goes by, there's no hold put on after.

Karen:

Right. Right.

Catherine:

You've brought up something really great. Of course, I run with this kind of information. I love the client who just called the company where she knew her husband worked and said, "Hey, when is my pension kicking in?" Because that can also bring up an undisclosed asset. So if they say we don't have any information, I think it's really easy for people to overlook because they don't ask about it. And because there aren't as many anymore it's just something that's overlooked, but why not? If you're out there and you know that your ex spouse is retiring and you don't have a pension, but you think they do call the company. I love that, Donna. And say, "Hey, can I receive my benefits?"

Donna:

Well, but the problem is if it's not been addressed in the marital settlement agreement, there may be no award to the former spouse because depending on the language in the marital settlement agreement, it may have only addressed certain retirement accounts that were disclosed and said the other party keeps all other retirement accounts in their name.

So if you know your spouse has worked for a company for at least five years, even if it was years ago, you should be checking if there's any type of pension or 401k type benefits that are kind of out there. The pensions are more problematic. You're right. Because you don't get a statement in the mail every quarter like you do with your 401k. You might get one annually if you're lucky and…

Catherine:

And now they're digital a lot. So you don't even see them if you don't have access to that information. And that brings me to a really good thing. Why is it so important to get actual account statements?

Donna:

Oh, that's a huge issue. So you want to get a complete copy of any type of retirement statements, not just a screen print, where a lot of people will go in they'll just print out, "Hey, today, my 401k is worth X." Well, that's good to know and you don't just want the first page of the statement because there's a lot of data that is forthcoming in page two, three, four, five and six that may not be showing on page one.

Donna:

You need to know if the participant's spouse, that's the employee's spouse is vested. If it's a 401k plan, so all of those dollars that are showing belong to the employee? Obviously the employee's contributions are always theirs, no matter what, but if there's some type of match from the employer, some employers have what's called a vesting schedule. Maybe they only give them 20% a year of that dollar that they're matching.

They have to work there for a period of time to get that whole amount. Loans are another big issue. Most account statements do not show if there's a loan on page one, that would be important to know. The other thing that's important to know is the different buckets of money. Most people are familiar with pre-tax, you put a dollar into your 401k. You're not paying any tax on it. But some folks worked for a prior employer, maybe they rolled in their old 401k into their current employer’s plan. That's a different bucket of money.

The employer has to segment that separately. Maybe their after tax contributions like a Roth 401k. A dollar and a Roth is not equal to a dollar in the kind of traditional bucket. So all of those things show up later on in the statement and I hate to even bring this up but it happens. With the technology age, it's real easy to sort of forge a screen print and manipulate it to be something that it is not. And so it's harder to forge a 12-page account statement. But you want that full account statement. There's data on there that you're going to need to see.

Catherine:

Oh, amen to all that. We have clients saying, why is it so important to get the whole statement? Here's the value. And for everything that you just mentioned, page three and four are missing, it's one of 12, okay, we want every page in one of 12, and then if it's not there we say why it's not there. But yes, gosh, if you're listening so important to have the statements.

Karen:

Mmm-hmm. It is. And you touched on the fact that a lot of people have prior employers with 401k accounts still remaining there. We run into that a lot and then they get to their divorce and now there's one, undisclosed 401k accounts and two, they're missing or they're faced with what their attorneys put in the marital settlement agreement. Now you've got five QDROs, the need for five QDROs. Can you talk about that a little bit? How to identify other 401k accounts that you wouldn't otherwise know about?

Donna:

So again, if you know your spouse has worked for an employer in the past, you want to be asking what your attorney should be asking on your behalf for discovery if there are any plans with those prior employers. Sometimes you can do some digging on the internet. Any ERISA governed plan has to file what's called a 5500, it's a tax document and those are public.

And you can see, does the plan even have a defined contribution plan or a defined benefit plan? Sometimes you can call the company and ask. Does your PPG, do they have a 401k plan? Yes, we do. Do they have a defined benefit pension plan? Yes, they do. And at least you will know there is a plan that exists. Does not mean that the employee is eligible for it but you at least want to know first the existence.

Catherine:

Exactly.

Karen:

I want you to highlight that because that happens a lot and I just wanted to reiterate that. Thank you for doing that.

Donna:

Mmm-hmm.

Catherine:

And it's really the big general question about these defined benefit plans that individuals don't necessarily have the privy to the information so they don't understand it. So when they do get a partial statement or they do get a screenshot or what have you, it'll say what your monthly benefit is at retirement. Now you're still working in most cases and then I'll give you a lump sum option. Can you explain to our listeners what the differences and what are the things to consider when you see that on a statement?

Donna:

Sure. So not all pension plans will offer a lump sum option but if they do it oftentimes is disclosed on that statement and that gives the employee or alternate pay if there's going to be a division, the potential option to either take a chunk of money and no further payments stream out into the future. You're almost kind of buying out your pension. You're taking that lump sum amount, you're transferring it into another retirement account, an IRA and then there's no more pension.

There are some pension plans that'll do kind of a hybrid. You can take a partial lump sum and it reduces that monthly benefit payment. Say without the lump sum, you're going to get $2,000 a month but if you take out the lump sum, now you only get $1,000 a month. You have to weigh those options. A lot of times it is in the plans benefit to offer a lump sum. They want to get the employee off their books. They want to get the liability off of their plate and push it over onto the employee's plate.

But if you do the math on what your monthly income stream would be over a theoretical life expectancy and then what the growth rate on that lump sum would be over that same life expectancy, you have to kind of weigh whether it's better to take the monthly payment or whether it's better to take the lump sum. And everybody's needs are different and everyone's concerns are different, but you definitely want to know all those options and what they mean for you and if it's beneficial or not.

Catherine:

So just as a follow-up to that, let's just say I get divorced and my spouse and I split his pension and now it's gone through a QDRO, will I now have the benefit of choosing a lump sum or an annual payment or do I have to get what my ex-spouse chooses?

Donna:

Well, it depends when the qualified domestic relations order is prepared. If it's prepared before they go into pay status, there are more choices available potentially. Once an employee goes into pay status, they have to choose what they're going to do right there and then. And usually those choices are irrevocable, right. You can't go back and say, "Oops, I didn't want to do that." Or "I [inaudible 00:20:53] do that." So that is important to know.

If it is before the employee goes into pay status, potentially you have the option of what's called on a pension plan at least, a separate interest QDRO, where in theory the pension is sort of dividing the pension into two parts, one for the employee and their marital portion and also any premarital or post-separation amounts. And then kind of one part for the alternate payee who's the former spouse and each spouse once that plan is divided can kind of take their piece and do with it what they want.

Catherine:

Hmm. So that's called a special interest QDRO.

Donna:

It's called a separate interest. So think of it riding on a train. Prior to the employee retiring and taking their benefit, usually most plans will allow, it's not a municipal plan or a government plan, they will allow for what's called a separate interest. That kind of division into two parts. And each person's on their own train kind of going forward into retirement.

If it's what's called a shared interest, everything is dictated by the employee spouse. The alternate payee doesn't really get to make any choices. They are stuck, not stuck, but with whatever the employee chooses. That's why you need to be sure proper language is in your agreement because you want to protect as many of those rights as you can. You don't want the employee electing something that might not be in your favor because it's permanent.

Karen:

Right. And if they have that shared interest, what happens when the participant passes?

Donna:

If they have put in language for survivor benefits, which is very important then the alternate payee or former spouse interchangeable kind of terms can continue on either all or a portion of that pension for their life expectancy. But those benefits have to be elected when the participant retires. Can't go back and say, "Oh, I didn't do that. We need to fix it." So it's very important to make sure those documents get in and that they're worded properly to protect those benefits for the former spouse.

Catherine:

Donna being a QDRO administrator do you often see, and I already know what the answer is, but if you're listening, this might be one of you, is that it's such lazy language and everyone's marital settlement agreement that you're just going to divide this or hire this person to do your QDRO, but all of these little points that you're bringing up, and I know Karen has experienced this a lot as well are things that could be negotiated. They're expecting this divorced couple to agree to this after the divorce, they're barely talking going through the divorce and these are major life choices that should be discussed before you sign your agreement. Isn't it true?

Donna:

Absolutely. And you are so right. Usually what happens is there's negotiation going on, the settlement agreement gets signed and then and only then do people start to get information about the plans that are going to be divided. And what happens is if you don't have proper language in your agreement, you may either lose benefits that you probably should have been entitled to.

And Catherine, like you said, if they're not even discussed during the settlement process, how do you know what your option is and what you're potentially giving up or not giving up. When you have a vague agreement it's subject to interpretation. Well, I might interpret things one way. Someone else might interpret things another way.

Karen:

Mmm-hmm.

Catherine:

Definitely.

Karen:

And I know I have prepared some QDROs as well. I'm not as experienced as a QDRO administrator as you are Donna, but I know that when the elections come through it's do you want to include gains or losses? And all of these, is it shared or separate and all of these questions that hosts the divorce agreement that the QDRO administrator is either picking for the clients or asking the clients to pick. And probably they have no idea what anything means at that point and a lot of times even their attorneys don't know how to interpret that specific type of language.

Donna:

Well, and sometimes it's done purposely, right. Sometimes if you have a real savvy attorney and maybe an attorney that maybe not as familiar with retirement account divisions, sometimes what you don't put in your marital settlement agreement favors one person or the other. And so one or two words can make a big difference. Are we going to include gains and losses or are we going to exclude them?

That can be a huge thing especially if there's a block of time that goes by before that order gets prepared and sent into the plan administrator for them to divide that plan. If the market's going crazy on the upside, and you're just dividing a plan 50-50 as of a specific date in the past that other party, there's going to be a windfall for one and perhaps a loss for the other and kind of vice versa. The market can go the other way too.

Karen:

Are you going to include loans, exclude loans?

Donna:

Yup.

Karen:

Are you're going to divide by shares or dollars? There's a lot of components there that people really are not aware of when they're dividing retirement plans and that the paragraphs and the settlement agreement is parties agree to split.

Catherine:

There's also another caution. You hear a lot about the gray divorces and the people in their 50s and 60s, and now even a lot of in their 70s coming to get divorced, but the ones in their 50s and 60s, some are eligible for retirement in earlier ages, right? So no one is anticipating a divorce they can go ahead and go into payee status before their spouse would know this and then file for divorce and you can't do something about it. So if you're kind of in the cusp of that time, this is something that you need to consider or put out there if there's a pension.

Donna:

A lot of plans but not all of them, if there is a spouse, a married spouse, not a divorced spouse and the participant, the employee spouse tries to go into payee status and chooses an option that's not a joint survivor benefit, many times the plan will require the spouse to be notified or to have a notarized signature or something. Not all plans, not all plans. But again, yeah, you want to know all those things. At least while you're married, death benefits usually are in place, right.

Because it's only the divorce that kind of severs that marital relationship. So if you're the beneficiary or even if you're just the spouse and it might be assumed, God forbid, if your husband or wife dies, you may still be covered up until the time the divorce decree is issued. Every state's different. Again, we're making some general kind of assessments today but you need to know all these things because you don't want to lose valuable benefits to which you're entitled.

Karen:

That's so true. Donna, how important is it to get a summary plan description? And can you describe what that is?

Donna:

Sure. So a summary plan description is basically the rule book that the company puts out in regards to their retirement account, right. If they have a 401k plan, whatever type of retirement plan that they have, there's a rule book behind the scenes it's called that summary plan description. That summary plan description though be aware, it's usually written for a single individual or a happily married individual. There's usually one little blurb in it that talks about, oh, by the way, if you get divorced see our written divorce procedures.

So the summary plan description is important because it does tell you when normal retirement is for a pension plan, it really becomes important more so in my mind, for pensions than for 401k type plans. They are pretty easy to divide. The rules are generally the same. Pensions are where things get tricky. You want to know how they calculate the benefit formula. When is retirement or cost of living increases something that the plan pays. Are there any supplemental type benefits that might need to be divided provided that they exist? And things like that.

Catherine:

So much information about these plans and people often times they just don't want to get involved with it. There's so many stress factors, as we all know, going through a divorce, dividing your home, dividing every asset and then you get down to this pension and you're just like, "Okay, you keep yours. I'll keep mine." Thinking it's easier thing to do. Where five years later you say, "Holy crap, why did I do that?"

Donna:

Well, even if you have two pensions that look the same, meaning they're valued roughly at the same, the rule book at each company may be different. Maybe one plan has survivor benefits, one plan does not. A lot of municipality kind of and union type plans have some odd kind of rules about police and firefighter, things like that. So even two plans that look on the surface to be similar, may have vast differences that if you knew what some of those differences were, you may want the right to either share them or give that right up to the other spouse and let them keep that plan.

Catherine:

Mmm-hmm. Great points. Such a great point. You're not always comparing apples to apples just because it looks that way.

Karen:

Mmm-hmm. That's so true marital assets, right?

Donna:

The devil's in the details ladies, you know that.

Catherine:

Absolutely. But if you're afraid to ask these questions, what are the best questions to ask?

Donna:

You mean for a divorce and client?

Catherine:

Mmm-hmm. If you're listening right now and you say, "Oh my gosh, we think my spouse has that. Or he has it somewhere else." What are the best questions to ask? A lot of people are afraid to even ask for that summary plan description. We've heard attorneys say, "Okay, we know what they made every year. We have it." Or "We have the screenshot." Or "We have this." How do you stand in your own confidence to ask these questions?

Donna:

Well, first of all, as we talked about earlier, definitely complete account statement. Don't do anything without that. A lot of times people can call the employer themselves, even if they're not the employee, right. I call all the time. And I ask for copies of the summary plan description. Some companies have them write on their online website, go onto their website, Google summary plan description or put QDRO or put divorced and see what pops up there.

But you can try to call the employer, especially if you are a spouse, because often times you can get that information. And you want to ask for three things. If there's a pension, two things if there's a 401k type plan. So if there's a pension, yes, the summary plan description. Even maybe more important than that is the client's written divorce procedures. Every ERISA govern plan should have them where they're not in compliance, but there's a document that kind of specifically talks about if an employee is getting, what is the kind of rule book there?

And then most plans have what's called a model or a sample qualified domestic relations order. You should ask for a copy of that too. Now I caution you there, don't just use it as a fill in the blank. You've got to know exactly what that means because you eliminate a word or you eliminate a paragraph it could have a huge financial effect, a windfall for one, not so much for the other. With 401k type plans which are called defined contribution plans, I usually only get written divorce procedures and a model DRO, obviously again, a statement, but I don't really get the summary plan description because nine times out of 10, there's nothing in there that I'm not going to already know.

Catherine:

Or you need the full statement.

Donna:

Yes. Full statement, no matter what.

Catherine:

Mmm-hmm.

Donna:

And keep asking if you're not getting it.

Catherine:

Yeah. Yeah. I love that. And don't sign until you have it. Don't sign, take pause. You deserve it.

Karen:

And these plans most of the time, if not all of the time cannot be divided until the divorce decree is in place. Am I correct on that?

Donna:

That depends. Most defined contribution plans will allow for division because the ERISA rule states, you can divide to a spouse, a former spouse, a child or a dependent of the employee. So a spouse is someone who is still married, a former spouse to someone who's not. Different from some pension plans they will require a copy of the divorce decree. When I say they meaning the employer before they will finalize the qualified domestic relations order. And again, that's just something to find out in advance so that you know.

Catherine:

This is really great information. Before we sign off, I want to touch on a little bit, incident to divorce. Can you explain the one-time withdrawal you're allowed to have from a plan?

Donna:

Yes. And that applies only really to defined contribution plans. So kind of throw pensions off to the side. It does not apply to pension plans. But if you are going to be receiving an award from your spouse who is the employee, you have the ability, once that money is divided at the plan level into your name, that you can take a one-time distribution. It's only once, you can't call every month and say you need $1,000, and it waives the 10% penalty you are under 59 and a half. So if you roll that money over into an IRA and then take the money out, you've lost that one time ability and you're going to be stuck paying that early withdrawal penalty of 10%. If you're under 59 and a half.

Catherine:

So you still have to pay taxes on the amount that you receive, you don't have to pay the penalty if you're younger than 59 and a half.

Donna:

Correct. The employer is mandatorily going to withhold 20%. They don't really care what your tax bracket is. The rule is they withhold 20%. If they withhold too much, you'll get it back when you prepare your tax returns for the following year. And if they don't withhold enough. So if you're in a higher tax bracket than 20%, you may owe a little bit more if you physically take the money out and spend it.

We're not talking about rolling it over to another plan, we're talking about if a lot of times you'll see it in divorce, maybe there's debt that needs paid off. And maybe there's not a lot of liquid assets. So one party will maybe take more from the 401k to agree to pay that debt off. And that's one way of getting some money out, still taxable money, but you can avoid that 10% penalty if it's done properly.

Catherine:

And I really want to bring that up because if you're listening, a lot of times you're being told, okay, you get this asset and you have this one-time withdrawal. Or some people don't even know about the one-time withdrawal, but you're thinking you're getting this and okay, you're trading away something else that might not have the same tax consequence. And you really need to consider what your needs are. Like you mentioned, you might be paying off a debt or you might be using that money to purchase a new home. But before you make that decision thinking that you're going to use those monies, yes you might be exempt from the 10%, but it's still taxable. And is that really equitable compared to what your spouse received?

Donna:

Well, that's why you'll hear the word thrown around where we're going to tax effect assets so that we're going to look at the tax consequence and theoretically pretend that that asset was liquidated. And if so, what would that tax consequence be? So, if I have a dollar, let's just use a dollar because it's easy. If I'm awarded a dollar, how much of that dollar am I going to keep?

It's in a savings account I'm going to keep 100% of it. If it's in a retirement account and I have to spend it, I'm going to be subject to some tax. So that dollar that I get, maybe I'm only receiving 80 cents. If my spouse is keeping a dollar but I'm only keeping 80 cents, how fair of a division do we have? Multiply that out to any type of asset size you're talking about.

Catherine:

Yes. So important and if you didn't get that rewind then listen again because once you sign that agreement, there's devils in those details that we discussed. If those details aren't there about getting the tax back, you're shit out of luck as my dad would say. So it's very important. Again, rewind and listen to that because I hate hearing these stories years later that you just didn't know, you were so emotionally drained at that point that you wanted to be done with it. And now you're stuck with that scenario.

Donna:

It's surprising too that some people out there that they physically have to take money out of their retirement account and give their spouse a check. That is not true either.

Catherine:

In fact, that's good point. Absolutely.

Karen:

That could be disastrous.

Donna:

Mmm-hmm.

Catherine:

Yes.

Karen:

So Donna do you prepare QDROs across the United States? Are you limited to a specific area?

Donna:

I am not limited to a specific area. My practice is located in southwestern Pennsylvania. Probably 90% of the QDROs that I draft are for attorneys in that locale. But I do draft for a few other states. I have some connections elsewhere. For ERISA plans, it doesn't matter where the plan is. The rule book is the same. For pensions you need to sometimes know a specific state rules and regulations.

For instance, if you have a government employee that works for the state or you have a teacher, each state has different rules and regulations. And so whomever someone is using to draft that document they do need to understand those rules and regulations so that they can properly draft that document to the party's satisfaction and know all the things and bells and whistles that need to be in all the oops factors that could happen if not done properly.

Karen:

Mmm-hmm. That's great. So how can our listeners find you Donna?

Donna:

They can find me by Googling my website, cheswickdivorce solutions.com. They can probably Google my name as well. They can call me. My phone number is on my website as well and send an email.

Catherine:

Or call us. We had to find you for sure because we're always looking for you.

Karen:

You're on speed dial with us, Donna.

Donna:

Oh, that's nice. Thanks.

Karen:

So this concludes our discussion with Donna Cheswick on the nitty-gritty issues based in retirement plan division. So thank you so much, Donna for being here with us and we look forward to more conversations with you.

Donna:

Thank you. Thank you for having me.

41 επεισόδια