What Is A QDRO & Why Is It So Important?

What Is A QDRO & Why Is It So Important?

Unless you have been through a divorce, you have probably never heard of a QDRO.  If you are going through a divorce and a retirement account is involved, a QDRO is extremely important.  QDRO is a term that means qualified domestic relations order.  This is a special order that is needed to divide a retirement account, such as a 401k account, while minimizing the penalties and taxes.

At its most basic, a QDRO divides a party’s retirement account in a divorce.  It may be drafted by either of the attorney’s involved in the case or by a neutral third party company.  Regardless of who drafts the QDRO, it must conform to certain provisions of the Internal Revenue Service Code, the specific rules of the retirement plan itself and the plan administrator.  Finally, it must be approved by the Court.  As you can imagine, with all of the requirements that must be satisfied, these documents must be prepared with some degree of precision.

Once the QDRO is signed by the court, the circuit clerk will mail the order to the plan administrator who will then begin the process of dividing the retirement account.  Generally, the plan administrator will do his/her best to maximize the tax benefits under the terms of the plan and the QDRO.  Again this division is done without any of the penalties normally associated with taking money out of one of these plans and thereby saving both you and your ex-spouse potentially thousands of dollars.

With a QDRO in place, one spouse will be receiving a portion of the other spouse’s retirement.  The party receiving this portion is called the “alternate payee.”  The only way to get this designation is with a QDRO, otherwise, such a distribution would be deemed an early withdrawal and subject to all of the penalties of an early withdrawal.

This brings up another point, during your divorce, you should never withdraw or borrow money from your retirement account without first consulting with your divorce lawyer.  First, you will most likely run afoul of orders of the court that prohibit such behavior.  Second, you may also be accused of dissipating (wasting) assets because you will incur penalties with the withdrawal.  Third, you will increase your tax obligations for the year.  Finally, it is just a bad idea because you are leave less money for you and your spouse to divide.  Often a retirement account is the second largest asset to divide behind the marital home.  Just like you should not start tearing walls out of the house and destroying the home’s value, you should not damage the value of the retirement account.

Obviously, QDROs are extremely important when going through a divorce.  As with most other things in a divorce, it is something you need to discuss with your family law attorney.

Photo courtesy of 401(K) 2012

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