What is a QDRO?
A Qualified Domestic Relations Order (QDRO – pronounced Quad-roh) has to do with the division of a retirement account in a divorce.
So let’s break this down:
Retirement accounts (or at least the parts that grow during a marriage) are considered to be marital property, and will usually be divided between the spouses upon divorce.
Qualified plans are qualified for special tax treatment. This applies to Individual Retirement Accounts (IRAs), pensions, 401(k) and 403(b) accounts, etc.
The advantage of qualified accounts you pay taxes when you take the funds out, not before you put the funds in.
But there are some restrictions –
- You don’t have access to the funds until you are 59 ½. (There is a 10% penalty if you take funds out before then.)
- You must start taking a minimum distribution when you are 72 (or a little earlier depending on your age).
- You pay taxes on the funds you take out at the time of distribution.
Retirement accounts are always held in the name of an individual. The QDRO allows you to transfer some (or all) of the funds in a retirement account from one individual to the spouse pursuant to a divorce agreement. The QDRO is an actual order signed by a judge directing the retirement plan to make the transfer.
Now, I can hear you asking, how much money will they transfer? Well, that depends on the terms of your agreement and on what kind of plan is involved.
Some retirement plans are “defined benefit” plans. For instance, pension plans will distribute a certain amount each month for the rest of the beneficiary’s life.
- Example: Chris has a pension plan which will pay out $3,000/month. A QDRO can direct the plan to pay out half to Chris’ ex-spouse, Dana. Chris will get $1,500/month and Dana will get $1,500/month.
Other retirement accounts are considered “defined contribution” plans. These accounts (e.g. an IRA or 401(k) account) are like bank accounts, in that you can look at a statement and know exactly how much is in there.
- Example: Chris has $100,000 in a 401(k) account. A QDRO can direct the plan to pay out half to Chris’ ex-spouse, Dana. Chris will get $50,000 and Dana will get $50,000.
In both of the examples above, the assumption is that all of the retirement account accrued during marriage. If some of the retirement account built up before the marriage, that amount will be considered premarital, and therefore, it will be that spouse’s separate property and will be excluded from the asset division.
- Example: Chris has $100,000 in a 401(k) account, $20,000 of which is premarital. A QDRO can direct the plan to pay out half of the marital portion to Chris’ ex-spouse, Dana. Chris will keep $20,000, and $80,000 will be divided. Chris will get $20,000 + $40,000 = $60,000, and Dana will get $40,000 via the QDRO.
- Retirement accounts that accrue during the marriage are generally considered to be marital property.
- Retirement accounts get special tax treatment from the IRS but have special rules.
- You need a QDRO to divide a retirement account.
- Talk to your lawyer (or mediator) about the best way to have a QDRO prepared if you are dividing up retirement assets.