If you hear the term QDRO, you’ll know that you’re a full-fledged grown-up.
It’s an abbreviation you’ll often hear from a judge in a divorce court, or perhaps your attorney will bring it up. QDRO stands for qualified domestic relations order. To learn more about QDROs, read on.
What Is a QDRO?
A QDRO is a court order that judges use to split up certain types of retirement plans, like a 401(k), into two equal parts for a divorcing couple. Not every retirement plan, however. For instance, a legal order called a “transfer incident to divorce” will carve up an IRA, or individual retirement plan.
You’ll usually get a QDRO if you and your spouse share a private pension plan, the aforementioned 401(k), a 403(b) plan, a 457 plan, employee stock ownership plans (known as ESOPs) or a defined benefit plan.
Generally, a QDRO is created to make sure both parties in a couple get equal shares of money from the retirement benefits they’ve accumulated throughout their marriage.
That said, sometimes in a contentious divorce, the court will designate half of the retirement assets to go toward alimony or child support if one member of the couple can’t fulfill his or her financial obligations (or isn’t attempting to).
[See: 35 Ways to Save Money.]
How Much Does It Cost to Prepare a QDRO?
It all depends on your retirement portfolio, assets and so on. Generally, a QDRO can run a few hundred dollars on the low side and into the low thousands, like $2,000, on the higher end. Frequently, your divorce attorney won’t actually prepare the QDRO; it will be done by an actuary or a company that specializes in putting together QDROs. But your divorce or family law attorney can put you in touch with a professional who does that work.
Benefits of a QDRO
There are a few reasons to consider creating a QDRO. They include:
Fairness. One of you may have earned most or all of the money, but the other presumably did his or her part, raising the kids or pets and keeping the household together. In most cases, you both probably have a good argument for getting half of your retirement assets.
Less stress down the road. “QDROs are important because they help to avoid conflict over the division of property oftentimes years or decades after a divorce,” says Stephen Cawelti, divorce attorney and owner of Cawelti Law in Los Angeles. “Too often, couples enter their divorce judgment and then forget to do the QDRO, which is a separate order that just applies to the retirement asset.”
Look at it this way: You may or may not think the world of your soon-to-be ex right now, but — especially if you have children — you’re going to want an amicable relationship going forward. If you don’t have a QDRO, you or your ex-spouse may come to regret not getting one. If you’re the one with the lion’s share of the retirement assets, your ex could regret it so much that you’re invited to discuss your retirement assets in court.
If you’re the one who doesn’t have many assets, meanwhile, that either means you could have a future retirement in which you struggle, or you decide you need to fight this in court, which means you’ll have to hire an expensive attorney at a time when you may not have much money.
In short, getting a QDRO now can help ensure that you and your ex both have retirement affairs in order and a healthy relationship in the future.
Fewer tax problems. “Normally, money removed from a qualified plan is taxed at ordinary income rates and could be subject to a 10% penalty as well,” says Beth Logan, an enrolled agent and owner of Kozlog Tax Advisors in Chelmsford, Massachusetts.
Financial certainty. Maybe you and your ex get along pretty well. Not enough to stay married but well enough that you see no future problems after the divorce. So you both agree that you don’t need a QDRO, and you’ll split the money down the road when you both retire.
That’s a bad idea. For instance, what if your ex dies, and your ex’s new spouse doesn’t think you deserve any of that money?
Even if things don’t work out that way, you could have problems if your name isn’t on these retirement accounts as a beneficiary. Many financial institutions simply won’t release the funds to you unless there’s a QDRO in place.
[See: 15 Tax Questions Answered.]
How Does a QDRO Work?
“The QDRO allows the money to be moved from the account holder’s qualified retirement plan account to the spouse’s retirement account without any taxes due until the money is distributed later,” Logan says. “If the spouse wants the money as cash — not as part of their retirement — or moved to a Roth IRA, then the spouse will have to pay the taxes on the money. The QDRO will eliminate the 10% penalty for the withdrawal.”
That can be a helpful thing, too, if you feel you can afford to take that cash from your future retirement. You may need the money as cash to, say, buy a house after a divorce, and not having to pay a 10% penalty is something that comes courtesy of the QDRO.
How Does a QDRO Work in a Divorce?
As for the mechanics of how this works, one of you should contact your attorney, who will write up a QDRO document, which will allow the retirement payments to be made.
Once that’s done, the QDRO document will be submitted to the retirement plan administrator, who will then review it and, if all looks fine, send it to the court.
Who Is Responsible for Filing a QDRO?
It usually falls to the spouse who will be receiving the QDRO benefits, and that makes sense. You may be divorcing somebody who is kind and generous and wants everything to well for you — but still may forget to file the QDRO. So if you’re the beneficiary, you should get the ball rolling to file the QDRO. Although ultimately, as noted, generally the attorney writes up the QDRO document and gives it to the retirement plan administrator, who actually files it with the court.
Meanwhile, if you think your soon-to-be ex doesn’t have your best interests at heart, you don’t want to put this task in his or her inbox.
You’ll also want to file the QDRO early in the divorce proceedings. If you wait until the last minute, for all you know, your spouse could invest your retirement income into something risky or withdraw the money and spend it. Hopefully not, but it’s just best to have this nailed down as soon as possible.
How to File a QDRO
The main rule here: Don’t do it yourself. Hire somebody who specializes in this sort of thing.
“Unless you’re a serious DIYer with nothing but time on your hands, it is not something I would ever advise someone to attempt on their own,” Cawelti says, adding that it can take months or even years (especially if you’re doing it yourself) to put these together.
He has a point. There’s a lot to filing a QDRO. Some things are easy enough. For instance, you’ll need to have the full name, mailing address and Social Security number of you and your soon-to-be ex, who will probably be referred to in the paperwork as the “alternate payee.” But if you were to draft a QDRO yourself, would you know to make sure that it adhered to ERISA guidelines? ERISA stands for Employee Retirement Income Security Act.
Kellie Rahl-Heffner, a family law attorney at Gross McGinley LLP, in Allentown, Pennsylvania, paints quite a picture of how many steps there are — after the QDRO is put together, let alone putting it together.
“Once the QDRO is drafted, it must be signed by all parties and taken before the judge for signature making it a court order. That order is then sent to the retirement plan administrator for processing. They will divert the enumerated funds to the alternate participant’s account,” she says.
Logan also stresses that the QDRO should be reviewed by the plan administrator before the divorce is finalized. “A QDRO that violates the retirement plan’s terms is not valid,” she says.
For instance, Logan says that if you have the QDRO stating the beneficiary will receive a lump sum payment from a pension, but the pension plan prohibits lump sum payments, that’s a big problem. “The spouse will end up with nothing,” Logan says.
That’s another reason not to draft a QDRO yourself and why your spouse shouldn’t do it. The stakes are just too high.
How Is a QDRO Paid Out?
If you’re the one receiving the payment, you have a few options.
Do you want all of the money you are entitled to, all at once? That sounds great, and it may be, but you probably will end up paying taxes on it at the outset, unless you put the money into another retirement account of your own. You’ll want to talk to a tax professional first.
You could receive the payments as an annuity and receive the money in installments. From a tax standpoint, that may be better.
You also could choose to let the money sit in the QDRO 401(k) or other retirement plan, so the money can keep growing tax-deferred until either of you need to take it out. In other words, you aren’t taking the money out of the accounts — but you are setting up a QDRO.
Again, it’s best to discuss all of these strategies with a tax professional. And if you opt for the money to stay put in the retirement accounts, you’d want to set up the QDRO so you would be free to invest your portion of the money however you see fit.
Do I Need a QDRO?
It really depends what you and your spouse have to split. If you one of you has a retirement account that contains, say, $600, you may feel like it isn’t worth fighting over that. Or if each of your retirement accounts contain similar amounts, you may feel it isn’t important to do a QDRO. Still, check with your attorney and see what he or she says.
If one of you has considerable assets saved for retirement in your name and the other spouse doesn’t, then it’s hard to make an argument that you don’t need a QDRO. And that, as duly noted, is as good a reason as any to prepare a QDRO — to avoid a lot of heated arguments in the future.
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Update 09/22/21: This story was published at an earlier date and has been updated with new information.