What Is a QDRO in a Divorce?

Definition & Examples of a QDRO in a Divorce

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A qualified domestic relations order assigns interest in a retirement plan to a former spouse or another dependent in the event of divorce. A retirement plan participant cannot assign interest in a plan to someone else unless a court orders a QDRO, which may require assigning a portion of a plan's assets to an alternate payee to meet family support or marital property obligations. The payment terms depend on the retirement plan and the QDRO.

If you are divorcing a spouse, you'll need a QDRO to be entitled to that spouse's retirement plan assets. Understanding a QDRO can ensure the smooth division of 401(k) or other retirement plan assets in a divorce.

What Is a QDRO in a Divorce?

A QDRO is drafted to identify an alternate payee for assets within an account, guaranteeing that more than one person will benefit from a retirement plan.

To count as a QDRO, an order must:

  • Be a judgment, decree, or order that a state agency issues, or a property settlement that a state approves.
  • Comply with state domestic relations law and the Employee Retirement Income Security Act (ERISA).
  • Relate to child support, alimony, or marital property rights that would benefit a spouse, former spouse, child, or another dependent of a retirement plan participant.

QDROs carry the same weight as child support, alimony, or any other property granted to each spouse in a divorce.

How Does a QDRO in a Divorce Work?

All retirement plans must include instructions for handling QDROs. If you are divorcing, consult with the administrator of your retirement plan for details on the paperwork that needs to be filed or other necessary steps.

The alternate payee must be a spouse, ex-spouse, child, or another dependent. Other alternate payees will not be considered.

Your plan administrator may offer a standard form used by the plan that's free and easy to fill out on your own. However, using one of these model forms isn't required to obtain QDRO status. An attorney also can 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 document must include the names and mailing addresses of the plan participant and the alternate payee, the name of each plan under the QDRO, the dollar value or percentage of the plan assets going to the alternate payee, and the number of payments included in the order and the time period of the order.

There is no one-size-fits-all approach to dividing assets through a QDRO. It all depends on the type of retirement plan, the type of benefits afforded under the plan, and the reasons for the division. As an alternate payee, you may be entitled to some or all of the participant's benefits under a retirement plan. A common approach splits benefits into two separate parts, and the time and form of the payment that the payee chooses may be different from what the participant chooses.

Types of Distributions Under a QDRO

A QDRO may afford you one or more options for how you take your portion of the distribution as the payee, including taking the money as a lump sum. This option would require paying taxes on the distribution immediately. If, however, the payee is a child or another dependent, the plan participant instead of the payee gets taxed.

You also can take the money as an annuity and receive your portion in installments, which can help spread out your tax burden. If you can afford to wait, the better move may be to leave the money in the QDRO 401(k) or another plan so that the assets can continue to grow tax-deferred until retirement.

Regardless of your age, money withdrawn from a retirement plan under a QDRO is not subject to the typical 10% early withdrawal penalty fee. Ordinarily, withdrawals that you take from a retirement plan before age 59½ are considered early withdrawals and are subject to a 10% penalty. Therefore, if you withdraw assets from a retirement plan that is not under a QDRO, you would be responsible for the penalty. 

Another option is to leave the money in the spouse's plan but retain the ability to invest your portion as the alternate payee as you choose. You would have to draft the QDRO in a way that specifies this request.

Additionally, you can move the money into a rollover IRA. This option would keep the assets tax-deferred and completely under your control.

Key Takeaways

  • A QDRO divides assets in a retirement account in the event of a divorce.
  • QDROs must be court-ordered.
  • Money withdrawn under a QDRO is not subject to a typical 10% early withdrawal penalty.
  • Payees have several options for how they receive their share of assets under a QDRO.