In this article, we will learn about the concept of a QDRO order in divorce cases, how it works, the types of distributions it can provide, the benefits of a QDRO, its limitations, and frequently asked questions about it.
How does a QDRO order work in divorce cases?
A QDRO order is drafted to name an alternative beneficiary of the assets within a retirement account. It allows more than one person to receive benefits from the retirement plan. A QDRO order may require allocating a portion of the plan’s assets to a second beneficiary, which can be done to meet obligations related to family support or marital property. The terms of payment depend on the plan and the details of the QDRO order.
Note: The alternative beneficiary must be a former spouse, child, or other dependent. Other alternative beneficiaries will not be considered.
Your retirement plan administrator may provide a standard form used by the plan. This is often free and easy to fill out yourself.
You are not required to use one of these standard forms to obtain a QDRO. An attorney can also draft a QDRO order on your behalf. This may incur additional costs but can provide peace of mind that the order will be processed correctly.
The drafted form should include:
- The names and addresses of the plan participant and the alternative beneficiary
- The name of each plan under the QDRO
- The dollar amount or percentage of the plan’s assets that will go to the alternative beneficiary
- The number of payments or the time period covered by the order
To qualify as a QDRO, it must be:
- A decision, order, or ruling issued by a government agency, or a property settlement approved by the state.
- In compliance with state family law and the Employee Retirement Income Security Act (ERISA).
- Related to child support, alimony, or marital property rights that will benefit a current or former spouse, or a former child or dependent of the retirement plan holder.
Note: A QDRO specifies the portion of the retirement plan that should be separated and held in a separate account on behalf of the former spouse. The time frame or start date for payments to the alternative beneficiary is included in the QDRO order.
There is no one-size-fits-all approach to dividing assets through a QDRO. Everything depends on the type of retirement plan, the types of benefits available under the plan, and the reasons for the division.
As an alternative beneficiary, you may be entitled to some or all of the benefits of the plan participant. One common approach is to split the benefits into two separate parts. The timing and method of payment chosen by the beneficiary may differ from what the plan participant chooses.
Example of a QDRO
QDRO orders carry the same weight as child support or alimony or any other property awarded to each spouse in the case of a divorce. For example, a state court issues a QDRO order for someone who owes alimony to their ex-spouse for their children. The QDRO order specifies the individuals involved in the divorce, along with their names and addresses. The QDRO order also mentions the name of the retirement or pension plan and the plan administrator, who will distribute the agreed-upon approvals.
Types of distributions under a QDRO
A QDRO may give you one or more options on how to receive your share of the distribution as a beneficiary.
Lump Sum
A lump sum may require paying taxes on the distribution immediately. If the beneficiary is a child or another dependent, the plan participant is taxed instead of the beneficiary.
Pension
You can also take the money in the form of a pension and receive your share in installments. This can help spread the tax burden over multiple time periods.
Note: Regardless of your age, money you withdraw from a retirement plan under a QDRO is not subject to the typical 10% early withdrawal penalty. Most money taken from a retirement plan before age 59 and a half is considered an early withdrawal, which will be subject to a 10% penalty. If you withdraw assets from a retirement plan that are not under a QDRO, you will typically have to pay the penalty.
IRA
You can
Also, transferring money to a conversion IRA account. This will keep the taxes on the assets deferred and completely under your control.
Benefits of QDRO
One of the main benefits of a QDRO is that it makes the process of asset transfer smoother. The spouses know the amount that will be transferred from the assets. Additionally, the spouse receiving the QDRO can leave the divorce knowing that they have retirement savings.
Moreover, the spouse transferring retirement funds from the retirement account does not have to pay a penalty. QDRO transfers are exempt from the usual 10% penalty that you typically have to pay for early withdrawals. The spouse receiving the money also does not have to pay taxes on the transfer as long as the funds go to a qualified plan (like an IRA or 401(k)).
QDRO Restrictions
If the funds within the retirement account are part of another QDRO, you won’t be able to access them through your QDRO. This could become an issue if your spouse has a QDRO from a previous marriage.
Also, if children or dependents are not included in the retirement plan, they will not be able to be added to the QDRO. Additionally, any money added to the retirement account before your marriage is not eligible for QDRO.
Frequently Asked Questions (FAQs)
What is the purpose of a QDRO?
When a couple gets divorced, a QDRO (Qualified Domestic Relations Order) provides a way to divide retirement assets.
How long does it take to get your money through a QDRO?
There is no specific timeframe for how long it takes to get your money through a QDRO. The timeline depends on how long it takes to draft and obtain the QDRO. Once the QDRO is obtained, the funds can be transferred quickly, depending on the type of retirement account involved.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Department of Labor. “QDROs: Dividing Retirement Benefits Through Qualified Domestic Relations Orders.” Pages 3 and 8.
Department of Labor. “QDROs: Dividing Retirement Benefits Through Qualified Domestic Relations Orders.” Page 6.
Department of Labor. “Frequently Asked Questions on Qualified Domestic Relations Orders.” Page 2.
Department of Labor. “Frequently Asked Questions on Qualified Domestic Relations Orders.” Page 1.
IRS. “Retirement Topics – QDRO – Qualified Domestic Relations Order.”
Fields and Dennis, Attorneys at Law. “Distribution Options for Retirement Assets Awarded in Divorce.”
Pension Plans for Lawyers. “QDROs.”
IRS. “Retirement Topics – Early Withdrawal Penalty Exceptions.”
IRS. “Retirement Topics – Early Withdrawal Penalty Exceptions.”
Law Offices of Anner. “Qualified Domestic Relations Orders (QDRO).”
Law Offices of Amy L. Gervich. “Benefits and Limitations of Qualified Domestic Relations Orders (QDRO).”
Dorothy J. Aguero, Attorney at Law. “Limitations and Challenges in Qualified Domestic Relations Orders (QDRO).”
QDRO Solutions. “FAQs about Qualified Domestic Relations Orders (QDROs).”
Source: https://www.thebalancemoney.com/what-s-a-qdro-2894206
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