What is a QDRO?
A Qualified Domestic Relations Order (QDRO) is a specific type of domestic relations court order that recognizes the right of an “alternate payee” to receive all or part of a retirement or pension plan, which belongs to another person.
Not to be confused with a divorce decree or property settlement, a QDRO specifically recognizes an ex-spouse’s, or soon-to-be-ex-spouse’s, interest in the other spouse’s qualified retirement plan. A QDRO can also recognize the rights of the plan participant’s children or other dependents. A state court can issue a QDRO, but a retirement plan administrator can reject it if its requirements do not agree with the plan’s rules. This is why it’s important to submit a QDRO to a retirement plan administrator as soon as possible and ideally before a divorce is final. A financial advisor or attorney who specializes in divorce can help you with a QDRO.
How a Qualified Domestic Relations Order Works in a Divorce
In a divorce, some marital assets are simpler to divvy up than others. Cash, of course, is the easiest. Property, like a house or car isn’t always simple, but usually straightforward. Retirement savings in employer-sponsored plans, on the other hand, can be very complicated. For example, if you liquidate the account in order to divide it, you’ll incur a steep early withdrawal penalty plus owe income taxes. However, if you leave it where it is, how does the non-participant spouse get their half, or whatever percentage that’s theirs?
Enter the qualified domestic relations order (QDRO). Issued by a state court, a QDRO establishes that one spouse has a claim to some of the other spouse’s retirement plan accounts. A QDRO states the dollar amount or percentage that belongs to the non-participant spouse, called the alternate payee, and the number of payments or time period to which the order applies.
One huge benefit of a QDRO is that it allows for early withdrawals from a 401(k) or other qualified retirement plans without incurring a penalty. As a result, if the plan allows it, an alternate payee can receive a lump sum or payments before they reach age 59.5 without a 10% IRS penalty.
It is very important that you do not wait to submit your QDRO years after your divorce as it may impact your rights to the retirement or pension plan.
If you have questions on whether or not you need a QDRO and how they relate to your divorce, schedule a consultation or call us at 443-741-1147. At Jacobson Family Law, an experienced attorney will ensure you have the information and resources needed to understand the law and assist you in making an informed decision in the best interest of you and your family.