By Eric Reich
As part of my continuing education for Ed Slott’s Elite Advisor IRA GroupTM, I periodically attend education conferences, review content on complex IRA issues, and take an assessment. One of the issues that was recently touched upon and questioned was the “in-marriage QDRO” or marital QDRO.
A Qualified Domestic Relations Order (QDRO) was created in 1984 as a way for spouses going through a divorce to split their assets. QDROs are used specifically to handle the separation of retirement plan assets (not IRAs). QDROs are actually court-ordered since there is no other way to separate retirement plan assets. For 40 years, this process has worked just fine, then along comes an idea that could potentially screw it up.
The newest “idea” is the in-marriage QDRO, which involves doing a QDRO for a couple who has no intent on getting divorced. Promoters will tell you that the statute allowing QDROs does not specifically reference “divorce” in it. While that may be true, the intent of the statute was for exactly that reason.
Why would a couple with no intention of divorcing need a QDRO? Well, for starters, QDROs only apply to retirement plans, not IRAs. Retirement plans, unlike IRAs, are difficult to access for reasons other than retirement. An in-marriage QDRO would allow couples to move money between them in a way that they never previously could. There are a few instances when this idea could potentially be helpful.
- Shifting money to a younger spouse when you don’t want to take a required minimum distribution (RMD)
Let’s say you have a large 401(k) and are about to turn 73, which is the current RMD age. Imagine you really don’t want to take the RMD because it will cause you to have to pay income taxes on money that you don’t need. By shifting that 401(k) balance to a younger spouse, you could delay that RMD for several years or even a decade or more, depending on his or her age.
- Retirement
If you retire early, you can’t typically distribute money out of your retirement account before age 59 ½ without paying a 10% penalty for a premature withdrawal. If you instead use an in-marriage QDRO and shift those funds to your spouse, who is older than 59 ½, the penalty will not apply.
- Possibly help with Medicaid planning
An in-marriage QDRO could shift funds from a sick spouse to a healthy spouse, which could potentially help with Medicaid planning in some states.
While all of these ideas may sound great, there are a lot of potential negatives to an in-marriage QDRO. For starters, if you shift assets from your retirement plan to your spouse, your spouse now controls those assets 100%. Your spouse can change the beneficiary to anyone they want. They could also withdraw those funds without your knowledge. In addition, when you file a QDRO, some company plan rules may not permit contributions into the retirement plan for a period of time. This could impact the company match and your tax deferment opportunities. You can imagine the scenarios that could come from these issues. In addition, there are fees and costs that apply to QDROs. Each state has its own rules and domestic relations laws. Lastly, under federal law, the administrator of the retirement plan providing the benefits affected by an order is the person initially responsible for determining if the order is a QDRO.
The biggest issue, in my opinion, is that neither the IRS nor the DOL has remotely suggested that this idea is legal. I personally do not think they are legal, and I would absolutely not want to be the test case before the tax court if/when the IRS decides to put a stop to them.
Ed Slott’s IRA Advisor Group℠ is a paid-membership, educational organization comprised of professionals of varying credentials. Membership in this organization does not imply a set level of skill or training. The logo and/or service mark is the property of their respective owners and no endorsement of Comprehensive Advisor, LLC is stated or implied. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
