If your divorce case involves retirement accounts, then it is likely that you will hear the term “QDRO” discussed at some point in your divorce case. This article provides background information on what a QDRO is in divorce.
What does “QDRO” Stand For?
A “QDRO” – pronounced “quad-row” – is an acronym for a Qualified Domestic Relations Order. This is a special type of order that a court may issue in addition to the final decree of divorce in order to divide certain types of retirement accounts.
These orders have very specific requirements in order to be effective. Those requirements come from both federal and state law as well as requirements set out by the plan administrator.
What Is The Purpose of A QDRO in Divorce?
A QDRO is used to divide certain types of retirement accounts without causing any adverse tax consequences. By adverse consequences, I mean penalties and taxable events.
A QDRO is not necessary to divide all types of retirement accounts without adverse tax consequences.
For example, Individual Retirement Accounts (IRA’s) may be divided with adverse tax consequences based upon the final decree of divorce. Other types of retirement plans, such as 401k’s and most pension plans require the court to issue a QDRO or risk adverse tax consequences in dividing the account.
How Does A QDRO Work in a Divorce?
A QDRO is a separate order from a final decree of divorce although it is usually signed by the judge at the same time as the divorce decree.
The final decree of divorce should also authorize the court to issue a QDRO to effect the property division terms in the final decree of divorce concerning the retirement account and set out the general terms of the division.
The QDRO adds the details to the terms for dividing the retirement account.
Once the court issues the QDRO, that QDRO is then delivered to the plan administrator who will divide the retirement account or pay out the retirement benefits in accordance with the terms of the QDRO.
What Happens If You Divide A Retirement Account Without a QDRO?
If the account is the type of retirement account that requires a QDRO, then you will end up paying early withdrawal penalties and income taxes on the division. This could be a very significant number
More importantly – the spouse withdrawing the funds from their retirement account is the spouse that will be liable for the penalties and interest even though the funds were given to the other spouse as part of the divorce.
Obviously, you should avoid this outcome if it is at all possible.