When going through a divorce process, it is common that you will need to divide your retirement accounts, just as you divide the rest of your assets and debts. The difference is a retirement account may require a special document to divide it, called a QDRO (Qualified Domestic Relations Order) or DRO (Domestic Relations Order). For the purpose of this article, we are going to refer to the documents generally as a QDRO.
What is a QDRO or DRO?
A Qualified Domestic Relations Order or Domestic Relations Order is a legal document used in the division of retirement accounts at the time of a divorce. The QDRO dictates the percentage or amount of an account a spouse is to receive from the account when it is divided. It additionally includes any other terms related to the account, such as a survivor beneficiary if applicable. As an example, consider that Spouse #1 has a 401(k) account through their employer. This account is only in their name, but was earned during their marriage. The court can order that a percentage or portion of this 401(k) is awarded to Spouse #2 as their property in the divorce. The QDRO is basically the direction sheet telling the administrator of the account what portion should be taken out of Spouse #1’s 401(k) and put into a 401(k) in Spouse #2’s name.
A QDRO is used for the division of “qualified” accounts while a DRO is used for the division of “non-qualified” accounts.
Why do I need a QDRO?
A QDRO legally divides a retirement account at the time of divorce without the typical implications of dividing such an account, like taxes and penalties. Let’s imagine that you are wanting to take money out of your retirement account or divide it to give a portion to another person, but you are not going through a divorce. This division or cash-out would typically include taxes and penalties. There is an exception during a divorce to divide your retirement accounts without taxes or penalties, with the use of a QDRO. This document indicates to the account administrator that the account can be divided without these negative financial implications.
That being said, please speak with your divorce professional before attempting any cash-out of an account, as removing the funds from the account rather than simply dividing the account can still result in tax or penalty implications.
When do I need a QDRO?
QDROs are typically used for accounts that fall into two categories - Defined Contributions Accounts and Defined Benefits Accounts. IRA accounts do not require a QDRO.
A Defined Contributions Account is typically an account you have through your employer. I like to refer to them as any account that starts with a “4”, as well as a few other account types. Some examples include: 401(k), 403(b), 401(a), and PSP. Some accounts may require a similar document to a QDRO referred to as a COAP (Court Order Acceptable for Processing) instead.
A Defined Benefits Account is also commonly referred to as a pension. While not commonly offered by many employers, it still appears in the education and government systems for employees.
On occasion, a QDRO may also be needed to divide other unique assets like an annuity. It will depend on the plan details associated with the asset.
How do I draft a QDRO?
A QDRO should always be drafted by a specialist. While some financial institutions may offer QDRO services in-house, it is more common that they do not. A QDRO specialist is typically an attorney with education specific to the QDRO process. Some specialists will charge you a flat fee per QDRO, while others will charge you an hourly rate. You typically need an individual QDRO per retirement account that needs to be divided. For example, if you have a 401(k), pension, and 403(b), you would usually need 3 QDROs to divide all of them individually.
Remember that you typically only have one chance to divide your retirement account. For this reason, it is particularly important to have it done the right way the first time. You want to complete your QDRO within about 60 days of your divorce being finalized to avoid any complications by delaying the process.