What Is a Qualified Domestic🅠 Rela🍨tions Order (QDRO)?

A qualified domestic relations order (QDRO) is a court decree that mandates how assets in a retirement plan or pension fund will be divided in a divorce. The QDRO may specify the amouꩲnts to be paid to a former spouse, child, 🔯or other dependent for child support, alimony, or marital property rights.

The recipient of money authorized by a QDRO must transfer it directly to another tax-advantaged retirement plan such as an 澳洲幸运5开奖号码历史查询:individual retirement account (IRA). Otherwise, the entire amount will be taxable as ♚income.

The terms of the QDRO must comply with the federal regulations in the 澳洲幸运5开奖号码历史查询:Empl𒁏oyee Retirement Income Security Act (ERISA) and the relevant state's domestic relations laws.

How a QDRO Works

Regardless of how most of a couple's assets are divided, the QDRO defines how their retirement savings will be divided if the couple has money in a 澳洲幸运5开奖号码历史查询:qualified plan such as a 401(k) or a 403(b). A separate process called “trans💜fer incident to divorce” is used for IRAs.

A QDRO must comply with the Employee Retirement Income Security Act (ERISA) and the domestic relations laws within the state's jurisdiction. ERISA was established by the U.S. Congress to provide a regulatory framework for employer-sponsored retirement plans and ensure protections for 澳洲幸运5开奖号码历史查询:beneficiaries and participants.

Who Is the Alternate Payee in a QDRO?

A QDRO grants the retirement account's "alternate payee” the right to a portion of the retirement benefits that the former spouse (the “澳洲幸运5开奖号码历史查询:participant”) earned through an employer-sponsored retirement plan. The payee may be a spouse or a dependent.

A QDRO, for example, might order the payment of 50% of the account assets that accumulated over the years of the marriage. The funds could then be transferred or 澳洲幸运5开奖号码历史查询:rolled over into an IRA for the beneficiary spouse.

A QDRO can assign funds to a child as child support payments. The beneficiary will be granted the funds and can have the mon🌃ey transferred to an existing or new retirement account in their name.

How to Initiate a QDRO

The spouse who will be the alternate payee of the QDRO commonly contacts an attorney to draft a QDRO document that will ord🔯er the funds to be transferred. Most plan administrators have standardized forms for this purpose. The drafted QDRO is submitted and, once accepted and approved by the plan administrator, is assigned to the court.

Benefits and Limitations of a QDRO

Benefits

The QDRO ensures that one spouse doesn't end up with no retirement funds in the event of a divorce.

The spouse making the payout is not subject to an early withdrawal penalty by the IRS for transferring the funds to the ex-spouse. Typically, the IRS charges a 10% tax penalty on any funds withdrawn from a tax-advantaged retirement account if the person is under age 59½.

The beneficiary receiving the funds is not taxed at the time of the transfer, as long as the money is transferred to a retirement account. If the funds are not paid into a retirement account, the money will be taxable. If the recipient is under age 59½, a 10% tax will be added.

Limitations

Assets will not be transferred under a QDRO if the money is already ⛎promised to another alternate payee via another QDRO.

Only benefits that the retirement ▨plan adm🐷inistrator offers are included in the transfer of the assets.

Contributions that were made to a pension or retirement plan before the couple married are not inclu🐷ded in the QDRO.ꩵ

Taxes on QDRO Payments

The QDRO defines how the money is distributed and the percentage or dollar amount allocated to the ex-spouse. The ex-spouse could opt to receive a lump-sum payment for the percentage of assets in the plan.

However, if the lump sum is transferred into a non-IRA account, the beneficiary must pay income taxes on that distribution. A QDRO distribution paid to a dependent or child is taxed to the plan participant.

The beneficiary can receive the assets in installments. Another option is leaving the money in the spouse's plan but retaining the right to invest the portion allotted to the alternate payee. The beneficiary must comply with IRS rules regarding retirement accounts following the transfer.

In retirement, distributions may be taxed based on the beneficiary's income tax rate, and the beneficiary must comply with the 澳洲幸运5开奖号码历史查询:required minimum distribution (RMD) rules. A spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if they were a plan participant.

A trustee-to-trustee transfer is typically the safest way to transfer retirement funds in a rollover from one retirement account to another. The funds move between two financial institutions: the participant's retirement plan and the beneficiary's retirement account. Neither individual touches the money, so the IRS doesn't count it as a withdrawal.

Example of a QDRO

Destiny and Kristen have been married for 12 years and hav𒁃e agreed to file for divorce. Destiny currently has $200,000 in her 401(k) retirement plan, of which $50,000 was in the plan before their marriage.

During the divorce proceedings, both parties agreed on the assets to be divided, including the 401(k). The court-ordered QDRO was draౠfted by a divorce attorney and submitted to Destiny's retirement plan administrator. The plan administrator approved the QDRO, which has the following terms:

• Destiny keeps the $50,000 that was in her 401(k) before the marriage.
• The remaining $150,000 in the 401(k) is split evenly between Destiny and Kristen since those funds are considered a 澳洲幸运5开奖号码历史查询:marital asset.
• Kristen can transfer $75,000 from Destiny's 401(k) into a separate retirement account in her name.

The Bottom Line

A QDRO isn't required as a part of a divorce proceeding, but it is often a good idea to put one in place. It ensures an even split of the retirement savings accumulated during a marriage.