Passage of CARES Act Highlights Power of In Marriage QDRO® Strategies
By Marcus T. Foote
Here’s a question we’re hearing a lot lately… Does the passage of the recent CARES Act by Congress in response to Covid-19 eliminate the need for an In Marriage QDRO® (IMQ) strategy?
While for some it may reduce the benefit and render the expense unnecessary, for the vast majority of prospective clients, however, the new law fails to impact the strategy at all. In some cases, we find it can enhance the numerous financial strategies provided through the use on an IMQ. In all cases, the passage of the CARES Act highlights the traditional benefits and unique power of the IMQ strategy.
Among other benefits, there are two main focuses of new law:
1. It provides a waiver of the 10% early withdrawal penalty for pre-59 1/2 distributions under $100,000.
2. It suspends the rule on required minimum distributions. In both cases, the benefit is temporary, lasting only through December 31, 2020, and contains certain restrictions. In contrast, an IMQ can achieve both benefits, has no restrictions and has no time limitations. If you just need cash to get you through the next few months, the cost of an IMQ may be unnecessary, and a small distribution pursuant to this temporary exemption will sufficiently care for your family. For those participants with more significant holdings in their 401k portfolio, the enactment of the CARES law highlights the urgency of controlling the investment structure of your portfolio by your trusted financial advisor. One of the benefits of an IMQ is that it allows you to switch your investment funds to an Individual Retirement Act (IRA) which can be more closely monitored,
actively rather than passively. Most Americans can remember the feeling when the stock market began to plummet at the beginning of March, as Covid-19 hit the United States. Participants felt helpless as they watched their 401k balances shrink day by day. What did you do? If you were like most people with 401k investments, you did nothing. Why? Because most participants are not financial advisors trained to react to market volatility. Imagine if you had your investments under the control of a trained professional instead of a generic 401k portfolio manager waiting for your instructions. Although most may have still lost money, the loss probably was far less for those participants whose advisors reacted fast enough to modify the investment risk during the times of high volatility.
The benefit of a trained advisor is to diversify your portfolio so that you can take advantage of the growth of the stock market without making the entirety of your retirement savings dependent on external events like a global pandemic in 2020 or housing bubble in 2008. To put things simply, the current uncertainty and the subsequent CARES Act does change things, and those changes create two types of situations relative to an IMQ strategy.
1. Situations where the CARES Act reduces the benefit of the In Marriage QDRO®?
- Participants wanting to withdraw less than $100,000 without the 10% penalty,assuming they qualify under Act’s restrictions.
- Participants that want to delay the payment of taxes on required minimumdistributions through December 31, 2020.
2. Situations where the CARES Act has no impact on an In Marriage QDRO®
- Participants who wish to strategically distribute more than $100,000 without the 10%penalty.
- Participants who have a younger spouse and want to delay the payment of taxes onRMDs for many years.
- Participants who wish to decrease their dependency on stock market volatility anddiversify their investment structure.
- Participants who wish to have their trusted financial advisor at the helms of their retirement accounts instead of a generic 401k fund manager at the end of a 1-800 number waiting for your instructions regarding portfolio changes. This benefit of the IMQ is especially urgent right now. For those participants who believe that the stock market will bounce back to previous levels, the questions become:
- What type of investment structure would best take advantage of the next stock market increase?
- Would moving your money out of limited options of your 401k and into the broad spectrum and diversity of an IRA under the management of your personal advisor help in that next stock market run?
- Participants who wish to completely exit the rollercoaster of the stock market and would prefer to invest in real estate, start a business or various other alternative
investments under a self-directed IRA? If you would like more information about this innovative tool available to any married couple with qualified funds, please visit our website at inmarriageQDRO.com to learn more.
Marcus T. Foote is a partner at Kuehne & Foote, APLC and co-founder of In Marriage QDRO, LLC. Mr. Foote has been board-certified in the area of family law by the Louisiana Board of Specialization since January 2002 and focuses his practice exclusively on community property divisions, military divisions, and Qualified Domestic Relations Orders (QDROs).