What is a QDRO? A QDRO is a qualified domestic relations order (QDRO) distribution that takes a set amount of money in a retirement plan and pays it to a spouse/dependent through the order of a court.
A typical instance in which people pay QDRO cost is when a married couple divorces, as the assets that get divided between both individuals do not include retirement plans.
In addition to its utility in divorces, this guide will cover a few other uses of QDROs, so read on to learn the full extent of QDROs.
Table of Contents
- 1 What Is a Qualified Domestic Relations Order (QDRO)?
- 2 What Does a QDRO Do?
- 3 How Does a QDRO Work To Divide Retirement Assets In Divorce?
- 4 Benefits Paid To a Child Or Other Dependent
- 5 Benefits Paid To a Spouse Or Former Spouse
- 6 Implementing a QDRO With a Defined Benefit Pension Plan
- 7 QDROs And Defined Contribution Plans
- 8 QDRO Financial Planning Considerations
- 9 Conclusion
What Is a Qualified Domestic Relations Order (QDRO)?
A QDRO is classified as a family document that one can issue in a family court under the proper circumstances. The vast majority of the time, a QDRO sees use in cases involving divorce, and it acknowledges the right that a spouse/dependent has to a portion of a retirement plan.
In addition to spouses, a QDRO can also affect former spouses and children. Although it functions somewhat differently in these cases, so we will cover the specifics of each of them in separate sections.
What Does a QDRO Do?
A QDRO divides retirement assets efficiently when a divorce occurs, as this process can often turn lengthy and messy between the involved parties when there is no QDRO. After a QDRO takes the necessary assets and turns them over to the former spouse, they become responsible for the taxes they will incur.
Recipients of any money in a QDRO can use the money to make purchases, such as purchasing a house, but there are different forms of distribution that one should consider before using the money for anything. Assets received in a QDRO are also sometimes rollover eligible, which comes with a set of distribution options that provide different benefits.
How Does a QDRO Work To Divide Retirement Assets In Divorce?
Generally, a QDRO works to divide retirement assets in divorce by taking a set amount of a person’s retirement money and transferring it to a spouse.
Can I Cash Out My QDRO?
If the spouse has a retirement account in their name, they can transfer the money to be directly paid out into that account.
There are also different options that the spouse has for receiving the assets. Transferring the funds into their retirement account is a common choice to avoid taxation, but there are also the options to receive the money in multiple payments or a lump-sum payment.
It’s also important to note that filing a QDRO doesn’t change the time frame of when funds become available.
How Long Does it Take to Get Your Money from a QDRO?
The funds take about two to five weeks to transfer into the account in the alternate payee’s name.
Benefits Paid To a Child Or Other Dependent
The taxation goes directly to the plan participant when paying a QDRO distribution to a child or other dependent. Aside from a spouse, the QDRO alternate payee distribution plan has to be a child, former spouse, or another dependent of a participant. However, there are instances where the funds must go elsewhere if the order specifies an exception.
To provide the proper benefits to a participant’s child, a QDRO may sometimes send the payment to a state department of family services instead of another dependent. Despite this not being very common, it’s good to know certain exceptions that are in place to offer flexibility to ensure involved participants properly receive their assets.
Benefits Paid To a Spouse Or Former Spouse
Benefits paid to a spouse or former spouse are subject to all the standard options in the division of retirement assets in a divorce. Any benefits paid to the spouse/former spouse get included in their income, and they can opt for lump-sum payments if the participant would have received the assets as a lump-sum.
The spouse/former spouse can also roll over a distribution tax-free and turn it into an IRA. However, this is only possible if they receive a distribution that qualifies for rollover under a QDRO plan.
Implementing a QDRO With a Defined Benefit Pension Plan
A defined benefit pension plan is where monthly payments get sent to a retiree. This type of benefit plan typically continues to send payments for the remainder of the recipient’s lifetime. Implementation of a QDRO with a defined benefit plan works primarily the same regarding rolling over funds, receiving lump sums, and receiving regular payments.
QDROs And Defined Contribution Plans
A defined-contribution plan is a pension plan that includes an employee’s specific account, and a defined sum gets put into the plan from the employee or employer. Common examples of these plans are 401(k) Plans and Savings Plans.
A QDRO implementation will divide up the account for defined contribution plans, and the spouse receiving the asset will receive a new account in their name. So, taking a 401(k) as an example, the owner of the account and their spouse would end up with two separate 401(k) accounts in their respective names.
QDRO Financial Planning Considerations
Due to different forms of taxation that can affect QDRO distribution, it’s essential to consider your options from a financial planning perspective if you’re the one receiving assets.
When a divorce settlement occurs, and QDRO divides a contribution plan, there is no 10% tax penalty on an immediate withdrawal of funds. This makes immediate withdrawals a relatively safe option, though keep in mind that the lack of a 10% tax penalty doesn’t mean standard income tax won’t still apply.
Hopefully, this short guide shows that there are many working elements to a QDRO. Some of them may seem a bit superfluous, but it’s crucial to understand how QDRO can work differently depending on the circumstances and the nuances that come into play.
This is especially the case if you are the receiving spouse of a QDRO, as you want to ensure that the funds you receive either now or in the future are fully secure. Not doing so can prove dangerous since there are already many other factors at play in a divorce, and the last thing you want is to lose out on assets that belong to you.
If you don’t fully understand the points covered in this guide or have further questions about other QDRO aspects, please don’t hesitate to contact us.