Do You Need a QDRO After Divorce?

Learn how retirement plan assets are split during a divorce

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When you get divorced, you normally split your assets. But that splitting doesn't automatically extend to your (or your soon-to-be) ex-spouse's retirement plan. That's where a qualified domestic relations order (or QDRO) comes in.

QDROs are legal orders from divorce courts used for the purpose of divvying up specific types of ordinary retirement plans, including IRAs, private pension plans, and 401(k) plans, with an alternate payee, most often a former spouse.

You don't get a QDRO automatically in a divorce, even if your ex-spouse has a substantial retirement account — you have to ask the court for one as part of your property settlement. Government or military pensions are subject to different laws, and so will not be covered by a QDRO.

How Does a QDRO Work in a Divorce?

In the process of a divorce, the parties on both sides will identify assets to be divided, including any retirement plans. These assets then will be the subject of settlement negotiations, or (in the case of a couple that fails to reach an out-of-court property settlement) will be presented to a judge, who will divide the assets.

Ultimately, you'll either reach a financial settlement that includes any retirement accounts, or the divorce court will decide what portion of the retirement account is fair for the payee to claim. If you are awarded a share of your former spouse's retirement account (either via settlement or by the judge), the court will issue a QDRO (most likely drafted by your attorney). Qualified domestic relations orders are submitted directly to retirement or pension plan administrators.

If you don't have a lawyer, you potentially can use a web-based template to create a QDRO you can submit to the court for approval. However, since the stakes can be very high, it is generally a better idea to allow an experienced attorney to handle a QDRO on your behalf, as any slip-up can cost you a significant amount of money.

QDRO paperwork has to be filled out carefully. In addition, the retirement plan targeted for inclusion in the marital settlement has to be one that's covered by the Employee Retirement Income Security Act (ERISA) of 1974. Military and police pension plans, for example, are far more difficult to share after divorce, because they tend to protect the plan owner's assets until death. Your attorney can advise you on all these details.

Retirement Accounts as Assets in Divorce

A soon-to-be ex-spouse with a retirement plan and financial stability has a lot to lose via a QDRO. That's why, in some cases, the person may propose trading another asset (for example, a house or other investments) in place of a share in the retirement account.

In this scenario, it's a good idea to have an open discussion with your spouse (and his or her lawyer) in order to learn about what assets mean more to whom. It's possible that the two parties can reach a financial settlement that doesn't involve splitting a retirement account, which in turn would avoid the need for a QDRO.

It helps considerably to have an attorney and a financial advisor to assist you in valuing the assets to be split as part of the divorce.

If you are the spouse who holds the retirement account in question and you're under the withdrawal age for your account, you do not have to pay an early withdrawal penalty (usually 10%) on money transferred to your ex-spouse under a QDRO. This protects the plan owner from unfairly having to pay taxes and penalties on retirement account money on behalf of the receiving spouse.

The Bottom Line

If you're divorcing and you don't have a retirement account of your own, you should ask the court as soon as possible for a share of your ex-spouse's retirement account via a QDRO. Make sure your lawyer (if you have one) knows about the retirement account asset and is prepared to fight for a share of it.

The danger of waiting too long to do this is that, if the plan owner (your ex-spouse) dies without having designated you as the payee, you could be left with nothing. It's best to initiate QDRO paperwork in the early days of the divorce so that the court can finalize the divorce and approve the QDRO at the same time.