What is a QDRO?

As per the Department of Labor, “a QDRO is a Domestic Relations Order, which has been filed with the court, and has been determined by the plan administrator to be acceptable or qualified under the rules of the plan itself. A QDRO recognizes the existence of an alternate payee (i.e. spouse, former spouse, and/or dependant) who has the right to receive benefits that are or will be payable to a member or participant of a retirement plan.”*

In simple terms, a QDRO is a legal document that is filed with the court, that instructs the plan administrator of a retirement plan and/or 401(k) Plan how funds are to be divided between separating or divorcing parties.

A QDRO is equally as important as your final divorce decree, yet many times overlooked due to its complexity and specific requirements that must be met in order for it to be considered qualified. Because QDROs are separate from divorce decrees, many attorneys do not incorporate this service as part of the divorce. Usually, parties are either referred to QDRO attorneys or QDRO preparers resulting in time delays and additional costs/fees. To save on fees, you may look to hire a QDRO preparer instead of an attorney. Since this area of expertise is very narrow, you must be cautious as to whom you use to prepare your QDRO. Any mistake, even minor ones in the legalese or the structure of the QDRO may cost you thousands of dollars, lead to years of expensive litigation, or long delays in the ability to access the assets.* For additional information, please also visit our Divorce Settlement Analysis and Consultation and QDRO Consultation and Services links or Contact Us for your FREE initial consultation.

A common mistake is not addressing a QDRO during the early stages of divorce proceedings. After a divorce is final, there is little incentive for the ex-spouse who is in possession of the retirement assets to sign any of it over. In addition, without a QDRO in effect, the ex-spouse seeking the retirement assets has no right to them if the former partner dies, remarries, or retires. In addition, by procrastinating, the alternate payee also risks the possibility that the participant may take an in-service distribution, borrowing money from the plan, terminating employment and taking a final distribution or market loss.*

Another common mistake is having your QDRO written in a manner that unnecessarily links the alternate payee’s ability to access the funds to a time when the ex-spouse becomes eligible to receive his or her benefits. For retirement plans and/or 401(k) Plans that allow it, distributions to an alternate payee can be a custodian to custodian rollover. However, in order to make that happen, the specifics must be addressed in the QDRO. Once a QDRO is written incorrectly, it is extremely expensive, time consuming, and difficult to gain access to funds.*

A financial planner can point out these issues that should be discussed, analyze the situation, and provide a suitable recommendation for you. The financial planners at the 401(k) Hotline are well versed in divorce issues and can prove to be a valuable member in your advisory team. Depending on your individual situation, our job at the 401(k) Hotline is to either minimize the amount awarded to your ex-spouse or maximize your potential award.

With your permission, we coordinate efforts with your attorney and/or accountant to ensure these issues are covered and implemented.* Please Contact Us for your FREE initial consultation.

Please also visit our Divorce Settlement Analysis and Consultation and QDRO Consultation and Services links.

* This information does not constitute tax and/or legal advice. FSC Securities Corporation and/or its representatives do not provide tax and/or legal advice. Please consult your tax advisor and/or attorney pertaining to your particular situation.

If you are under age 59 ½, a 10% premature penalty may be assessed on all distributions you receive. Waiver of the 10% premature penalty may apply in some specific circumstances. Employees should consult their tax advisor pertaining to their particular situation.

By taking substantially equal periodic payments, you avoid incurring the 10% premature distribution penalty. The substantially equal distribution schedule selected must continue for at least 5-years or until you reach age 59 ½, whichever is longer, or you will be subject to a 10% premature distribution penalty on all payouts already received. Further details with respect to substantially equal periodic payment formulas are provided in IRS Notice 89-25.

All distributions from your retirement account are taxable in the year received. Please note, that at age 70 ½, you must begin taking minimum distributions from your retirement plan.

Distributions for any of the above reasons involve specific tax regulations and options. Please consult your tax advisor before requesting the distribution. This information does not constitute tax advice. FSC Securities Corporation and/or its representatives do not provide tax advice. Please consult your tax advisor pertaining to your particular situation.

Information and opinions expressed are strictly those of the author and may not be those of FSC Securities Corporation.