QDRO Corner: Dividing Defined Contribution Accounts: When to Equalize the Balances Out of As Few Accounts as Possible, and When to Divide Each and Every Account

We’ve all seen the cases where the parties have multiple retirement accounts, some traditional, some Roth, some mixed, some IRAs, some qualified employer-sponsored accounts.

The first consideration is Roth and traditional funds. Roth funds have already been taxed, therefore they are of different value than traditional funds which will be taxed when removed from the retirement account. Since they are not of the same value, they should not be compared against each other. Meaning, if a couple has both Roth and traditional accounts there should be at least two DROs. 

The second consideration is the investments within the accounts. If equalizing multiple accounts out of just one, is that account invested in risky or conservative investments? Are all the accounts invested in a similarly risky or conservative fashion? Depending on how the market is behaving, it will impact the market gains and losses on the account balance, and will likely impact each party’s preference as to which account is funding the transfer.  

Since DROs take substantial time to be processed before the funds are actually transferred, this is an important consideration, especially in today’s volatile market. Someone in tune with the market might suggest the transfer come out of one account of another because they anticipate that such account will do better or worse in the market while the DRO is being processed. But, would it be more in line with the agreement to divide each account so that the transfer comes out of all the investments, risky and conservative, and the alternate payee shares in the gains and losses across all accounts?

The final consideration on whether to divide each account or equalize out of one account is the cost of having the multiple orders prepared. Sometimes parties have over 6 retirement accounts to divide, which at a cost per order could be substantial. In that case, the client has to determine whether they believe they will receive more gains from dividing each account and do they have the current cash available to pay for those orders.