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QDRO (Qualified Domestic Relations Order) and Divorce

Making the decision to seek a divorce is never easy. Figuring out how to split assets can take time and even mediation or assistance from a good lawyer. During the divorce process, you may be tasked with drafting and submitting a QDRO document to make sure that all assets are distributed evenly. This specific court order is sometimes necessary to ensure that assets from a retirement plan are equitably split between both spouses. You may want to file a QDRO since the division of assets doesn't typically extend to your retirement plans.

This article offers a comprehensive and detailed look at qualified domestic relations orders and how they are paid out.

What is a Qualified Domestic Relations Order (QDRO)?

A QDRO (pronunciation: "quad-row") is a court order, decree, or judgment that requires a retirement plan to be used to pay for alimony, child support, or marital property rights. As such, QDROs can factor heavily into your divorce and the division of assets that invariably occurs. This type of court order is helpful because a retirement plan administrator is unable to split funds between both spouses following a divorce unless a court order has been put into place.

Keep in mind, however, that the rules associated with dividing retirement account assets differ depending on the exact retirement plan that you have.

How a QDRO applies to your retirement accounts in a divorce

A QDRO can be used to divide the assets into various types of retirement plans, which include everything from 403(b) plans to 401(k) plans. Once this court order is issued, it's possible to use the assets within a retirement plan to pay for marital property rights, alimony, or child support to a child, spouse, former spouse, or any other dependents you might have.

Keep in mind that these court orders will need to fully comply with domestic relations laws in the exact state that you live in as well as ERISA, which is a bill signed into law by the U.S. Congress pertaining to employee retirement income. The ERISA bill was designed to provide a certain level of protection for participants and beneficiaries alike.

The manner in which a QDRO divorce settlement is used depends on who the alternate payee is. If you have a sizable retirement account, a QDRO could be issued to transfer 50 percent of the total value within the account to an IRA for your former spouse. It's important to understand that the benefits derived from a QDRO aren't solely provided to the alternate payee while the participant is still alive. In the event that the participant dies, survivor benefits may be issued through a QDRO.

How do I know if I need a QDRO?

A QDRO is required if you need to divide one spouse's retirement plans. Without a QDRO, the other spouse has no formal rights to said retirement benefits — even if the divorce papers state that the account must be divided between spouses. Ideally, you should incorporate a QDRO into the divorce judgment to avoid the need to reopen the divorce should one spouse want a share of the account later.

QDRO and pensions, IRAs and other retirement funds

The primary accounts that a QDRO applies to include:
  • 401(k) accounts - This is an employer-sponsored pension account that's funded from your paycheck but can be matched by your employer.
  • 403(b) accounts - These retirement accounts are available to employees of the government or nonprofit organizations.

While qualified domestic relations orders can be issued for 401(k) and 403(b) accounts, they don't apply to IRA accounts. Instead, you will need to look into the "transfer incident to divorce" process, which applies specifically to IRA accounts.

When do I need to do a QDRO?

You should incorporate it into your divorce settlement agreement to avoid hassles and expenses post-divorce (reopening the case to change the division terms). You can file a QDRO at any time, but the longer you wait, the more complicated and costly it will be.

Splitting your 401(k) with your ex-spouse in your divorce settlement

When you seek a divorce, most states require that assets be divided evenly or in an equitable manner between spouses. If you had some money in your 401(k) before you were married, these assets won't be included in the assets that should be divided upon divorce. However, you will need to split assets that accrued during the marriage, which includes all of the contributions to your 401(k) that occurred throughout your marriage.

As mentioned previously, retirement plan administrators are unable to complete this task on their own, which means that you will need to seek a court order in the form of a QDRO. In most cases, this type of court order is drafted by a QDRO attorney on behalf of the beneficiary spouse.

Sometimes you don't need a QDRO but you still have to divide your retirement accounts. This most commonly happens with IRAs. IRAs can be transferred by letters of direction from the account-holding financial institutions. Splitting an IRA is often quicker than division via a QDRO.

How is a QDRO paid out?

There are several methods for paying out QDROs. Once a QDRO is issued, exact details for how one spouse should receive the assets from the other spouse will be included in the documentation. When it comes to retirement plans, the money from the account will first be divided with a portion being given to the ex-spouse, which is a process that's referred to as the separate interest approach. The QDRO will specify the dollar amount or percentage that must be distributed to the ex-spouse. These funds can be transferred as a lump sum into a non-IRA account.

However, the beneficiary of this distribution would be tasked with paying a certain amount of income taxes. It's also possible for the funds to be transferred to a different type of retirement account, which may allow you to avoid tax implications. The beneficiary can also request the assets to be paid in installments.

QDRO forms, processes, and fees

To begin the process of obtaining a QDRO, you will first need to gather information about the agreement between you and your spouse for dividing assets as well as details about the exact retirement plan that the QDRO will apply to. The beneficiary of this order must ask their attorney to draft a request form, which will then be given to both parties to review and sign. This process will occur while divorce proceedings are ongoing.

Once you have signed this form, it will be submitted to a judge for further review. If a court approves the QDRO request, the judge will send the QDRO directly to the plan administrator for final approval. The entire process costs an average of $500 to $750. However, attorney fees differ depending on where you live and the attorney you hire, which means that your total fees can be anywhere from $300 to $3,000.

How do I find a good QDRO attorney near me?

If you want to find a qualified QDRO attorney near you, you must know what to look for. Make sure that the attorney you're thinking of hiring is a professional in good standing who has extensive experience with qualified domestic relations orders. When you sit down with this attorney for your initial consultation, they should be able to answer any questions you might have about the QDRO process and how it will affect you. It's also essential that the attorney you hire is upfront with you about the costs of hiring them and how you will be required to pay. Search online for customer reviews to gain a better understanding of an attorney's reputation before you hire them.

State-specific QDRO rules

As touched upon previously, domestic relations laws in a specific state can dictate what a QDRO looks like. State regulations may alter how assets will need to be divided. It's also possible that the fees for drafting a QDRO will be higher or lower than you anticipate depending on the state you live in.

A QDRO attorney can help you navigate state regulations in regards to QDROs. Dividing assets evenly or equitably can be a stressful experience, which is why it's highly recommended that you seek the services of a qualified and reputable attorney. The attorney you hire can help you navigate the entire process in a smooth and straightforward manner.