By Joel M. Blau, CFP and Ronald J. Paprocki, JD, CFP, CEO
Orthopaedists are not immune to financial devastation associated with divorce. According to a John Hopkins study, in some specialties, physicians may be at a higher risk for divorce—chiefly psychiatry and surgery. Further, the study cites, “…some specialties are at higher risk for divorce than their medical brethren in other fields.”
Given that the largest financial asset many orthopaedic surgeons have is their practice retirement plan or IRA, it is important to understand the economic impact of divorce and what choices are available.
In situations where one spouse has been out of the workforce during all or part of the marriage, that spouse may not have had an opportunity to save for retirement on an individual basis and thus may be entitled to a substantial share of the spouse physician’s retirement benefits.
In other cases, retirement plans may be used to balance a division of marital assets. An understanding of the nuances associated with dividing retirement plan assets is critical for today’s physicians to avoid surprises down the road.
Need for a Qualified Domestic Relations Order
Retirement assets, categorized into qualified retirement plans (defined benefit plans and defined contribution plans) or Individual Retirement Accounts (IRAs), can be divided like any other part of the marital estate. But in order to divide a qualified retirement plan, you will need to obtain a Qualified Domestic Relations Order (QDRO) (http://www.divorceinfo.com). A QDRO is a judgment, decree, or court order issued to give a spouse, former spouse, child or dependent of a participant in a retirement plan the right to receive all or part of the benefits. Without a QDRO, the plan administrator would not be able to release the assets to someone other than the account holder, or plan participant.
From an income tax standpoint, the distribution to a spouse or former spouse is taxable as current income, unless the distribution is rolled over to an IRA. If, on the other hand, the distribution is made to a child or other dependent, the distribution is taxable to the plan participant.
In the case of dividing an IRA, a QDRO is not needed, as a decree of divorce or other written instruments incident to divorce is satisfactory. In addition, the transfer will not be considered a taxable event to the participant or the recipient if properly structured. In order to avoid taxation as well as a potential 10 percent early withdrawal penalty for distributions made prior to age 59, the spouse, or former spouse, must roll the funds into an IRA.
For the proper drafting of a QDRO, work with someone who has extensive experience and training in pension administration and the various regulations, such as an attorney or QDRO specialist. Keep in mind, not all attorneys have experience with qualified retirement plans. Many use a “boiler plate” document, known as a “model,” which may not contain all the provisions critical to you and your specific situation.
Since QDROs present unique problems for parties in domestic relations proceedings, be sure to do your homework. As with any legal work, determine up front what fees are involved. A QDRO can be simple, straightforward, and reasonably priced if it transfers interest in a defined contribution plan, such as a profit sharing or 401(k) plan. The QDRO for a defined benefit plan (one that promises a future retirement benefit) can be very challenging and often times prohibitively expensive.
If the split of marital assets can be made without including a qualified retirement plan by using an IRA or other substantial investment assets, the procedure may be more cost effective. For specific financial planning advice during the divorce process, a relatively new professional known as a Certified Divorce Planner (CDP), may be able to provide some additional insight. For more information, contact The Institute for Certified Divorce Planners (https://www.institutedfa.com/).
Joel M. Blau, CFP, is president of MEDIQUS Asset Advisors,
can be reached at (800) 883-8555 or firstname.lastname@example.org
Ronald J. Paprocki, JD, CFP, is chief operating officer of MEDIQUS.