Definition and Example of a QDRO in a Divorce
A QDRO is drafted to name an alternate payee for the assets within an account. It allows more than one person to receive benefits from a retirement plan. A QDRO may require assigning a portion of a plan's assets to a second payee, which can be done to meet family support or marital property obligations. The payment terms depend on the plan and details of the QDRO.
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 other dependents of the person holding the retirement plan.
QDROs carry the same weight as child support, alimony, or any other property granted to each spouse in a divorce. For example, a state court orders a QDRO for an individual who owes back child-support payments to their former spouse. The QDRO outlines the participants involved in the divorce, their names, and their addresses. The QDRO also lists the name of the retirement or pension plan and the administrator of the plan.
The QDRO stipulates the portion of the retirement plan to be segregated and held in a separate account on behalf of the former spouse. The time frame or commencement date for payment to the alternate payee is included in the QDRO.
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 plan for details. You may need to file paperwork or take other steps.
The alternate payee must be a spouse, ex-spouse, child, or other dependent. Other alternate payees will not be considered.
Your plan administrator may offer a standard form used by the plan. This will often be free, and easy to fill out on your own.
You don't have to use one of these model forms to obtain QDRO status. A lawyer also can draft a QDRO on your behalf. That may be worth the added expense. It can provide peace of mind that the order will be done the right way.
The form drawn up 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
- The number of payments included in the order
- 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. One common approach splits benefits into two separate parts. The time and form of the payment that the payee chooses may be different from what the plan 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. This could include taking the money as a lump sum.
A lump sum would require paying taxes on the distribution right away. If the payee is a child or another dependent, though, the plan participant gets taxed instead of the payee.
You also can take the money as an annuity and receive your portion in installments. That 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. If you choose that option, the assets can keep growing tax-deferred until your retirement.
No matter your age, money withdrawn from a retirement plan under a QDRO is not subject to the typical 10% early withdrawal penalty fee. Most money that you take from a retirement plan before age 59 1/2 is considered an early withdrawal, which would be subject to a 10% penalty. If you withdraw assets from a retirement plan that is not under a QDRO, you will have to pay 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.
You also can move the money into a rollover IRA. That would keep the assets tax-deferred and completely under your control.
- A QDRO divides assets in a retirement account in the event of a divorce.
- It must be ordered by a court.
- Money withdrawn under a QDRO is not subject to a typical 10% early-withdrawal penalty.
- Payees have many options for how they can receive their share of assets under a QDRO.