You’re in that final stretch of your divorce; you can see the finish line ahead and have reached a settlement agreement with your spouse. Now your attorney or mediator turns to you and says, “You are going to need a QDRO and that will be an additional cost.” So, what is a QDRO and why would you need one?
The QDRO is the last step in actually dividing your qualified retirement accounts. Most divorces will ultimately involve a QDRO. QDRO is an acronym for a legal document called a Qualified Domestic Relations Order and is required whenever a divorcing couple wants to divide a qualified retirement account. “Qualified” refers to the tax benefit that the account qualifies for.
A Qualified Plan is typically held by an employer and includes 401(k) plans, 403(b) plans, pensions, 457 plans, deferred compensation plans, and some restricted stock unit accounts.
To assign all or a portion of a Qualified Retirement Account to a non-employee spouse, the divorce decree must state that an amount is being transferred and then the second document, a QDRO, must be completed and submitted to the plan administrator for the division to take place. The amount transferred can be a dollar amount or a percentage of the account. Make sure you know what the number is supposed to be, dollar or percent, and ensure it is stated properly in the QDRO.
There is also a little-known benefit to dividing your qualified retirement accounts via QDRO – you have one chance to take a distribution from the account and avoid the 10% early withdrawal penalty if you are under age 59½. If you need cash for any reason, you can elect to have some, or all of your portion of the retirement account sent to you in cash instead of rolled over into an IRA or another qualified plan. You will owe tax on the amount that you withdraw but will not owe any penalty.
IRAs or, Individual Retirement Accounts, do not require a QDRO. IRAs can be split by providing the IRA custodian (the company where the account is held) with a copy of the divorce decree or separation agreement once it has been approved by the court.
The QDRO process can be time consuming and does not move as quickly as you would expect. Conversely, an IRA division can be facilitated relatively quickly as long as both parties are cooperative with providing their account numbers and signing off on paperwork. If the party who will be receiving part of the IRA does not already have their own IRA account, they will need to open one prior to being able to receive their funds. If the receiving spouse elects to have the money sent straight to them, and not rolled directly into their own IRA, they will owe tax on the amount received and they may be subject to a 10% penalty if they are under age 59½, unless they deposit all the funds back into an IRA within 60 days.
Dividing the retirement accounts after an agreement has been reached can be more complicated and time consuming than anticipated. Be sure you have an expert that can guide you through the process to make sure you don’t make any mistakes.