What's a QDRO?

couple upset on couch
••• Getty Images

The marriage is over, so who gets the retirement plan? Like other assets, your retirement nest egg is included in marital property and therefore up for grabs in a divorce. Ex-spouses, children and other dependents may be entitled to a portion of another spouse's 401(k) or related qualified employee retirement plan. How much depends on your state, circumstances under which the marriage ended, and various other factors. 

Complicating matters further is the tax-advantaged status of qualified retirement accounts. Under typical circumstances, anything taken out before retirement can be subject to early withdrawal penalties. Divorces are anything but typical. That's where the right paperwork can help. It's called a QDRO, qualified domestic relations order, and if you are divorcing a spouse it's what you need to divvy up the retirement plan assets. A QDRO is basically a document, drafted in a specific way, that recognizes an alternate payee for the assets within the account. In other words, it's a court order that guarantees that more than one person will benefit from the retirement savings. 

Understanding the QDRO

There are a few important things to know about a QDRO because ignorance can be costly. Regardless of your age, money withdrawn through a QDRO is not subject to the typical 10% early withdrawal penalty fee. You could easily face those penalty charges with one a simple QDRO mistake.

A QRDO is a domestic relations order, meaning it is made by a judge or decree and is as serious as child support, alimony, or any other property granted to each spouse in a divorce. The state must enter a judgment or decree endorsing or approving the QDRO, and it must also be recognized by the federal government under ERISA

The alternate payee can be a spouse, ex-spouse, child or another dependent. Other types of alternate payees will not be considered. These document must be structured in a certain way to be considered valid. It must include:

  • The plan owner's name and mailing address
  • Alternate payee's name and mailing address
  • Percentage going to alternate payee
  • How that percentage is determined
  • The number of payments included in the order
  • How the payments are to be made

It must be correctly verified to be considered valid under the law. Once approved, the QDRO document is given to the plan administrator, who then executes the plan within the QDRO. The plan administrator will notify the alternate payee of the order, along with its validity and instructions. The timeline for the actions will be outlined. 

How to Get a QDRO

If you are divorcing, start by asking for more information through the administrator of your 401(k), 403(b), 457(b), defined benefit pension or related retirement account (not including IRAs). There may be a standard form used by the plan that's free and easy to fill out on your own. An attorney can also draft a QDRO on your behalf, which may be worth the added expense if it provides some assurance that the order will be done correctly. 

The Department of Labor has some QDRO frequently asked questions to help you understand some of the legal specifics. 

What to Do With QDRO Assets

If you have received or plan to receive retirement plan assets through a QDRO, you have many options. You could take the money as a lump sum and pay taxes on it today. But if you can afford to wait, the better move may be to could keep the money in the qualified retirement plan (e.g. 401k) and let it continue to grow tax-deferred until retirement. You may even draft the QDRO so that the alternate party (you) can leave the money in the spouse's plan but retain the ability to invest your portion as you choose. Or you could move the money into a rollover IRA that keeps the assets tax-deferred and completely under your own control.