Your plan administrator may offer a standard form used by the plan. This will often be free, and easy to fill out on your own. You don’t have to use one of these model forms to obtain QDRO status. A lawyer also can draft a QDRO on your behalf. That may be worth the added expense. It can provide peace of mind that the order will be done the right way. The form drawn up must include:
The names and mailing addresses of the plan participant and the alternate payeeThe name of each plan under the QDROThe dollar value or percentage of the plan assets going to the alternate payeeThe number of payments or time period included in the order
To count as a QDRO, an order must:
Be a judgment, decree, or order that a state agency issues, or a property settlement that a state approves. Comply with state domestic relations law and the Employee Retirement Income Security Act (ERISA). Relate to child support, alimony, or marital property rights that would benefit a present or former spouse, former child, or former dependent of the person holding the retirement plan.
There is no one-size-fits-all approach to dividing assets through a QDRO. It all depends on the type of retirement plan, the type of benefits afforded under the plan, and the reasons for the division. As an alternate payee, you may be entitled to some or all of the participant’s benefits under a retirement plan. One common approach splits benefits into two separate parts. The time and form of the payment that the payee chooses may be different from what the plan participant chooses.
Example of a QDRO
QDROs carry the same weight as child support, alimony, or any other property granted to each spouse in a divorce. For example, a state court orders a QDRO for an individual who owes back child-support payments to their former spouse. The QDRO outlines the participants involved in the divorce, their names, and their addresses. The QDRO also lists the name of the retirement or pension plan and the administrator of the plan, and the administrator makes the agreed-upon distribution(s).
Types of Distributions Under a QDRO
A QDRO may afford you one or more options for how you take your portion of the distribution as the payee.
Lump Sum
A lump sum would require paying taxes on the distribution right away. If the payee is a child or another dependent, though, the plan participant gets taxed instead of the payee.
Annuity
You also can take the money as an annuity and receive your portion in installments. That can help spread out your tax burden.
IRA
You also can move the money into a rollover IRA. That would keep the assets tax-deferred and completely under your control.
Benefits of QDROs
One of the main benefits of a QDRO is that it makes the transfer of assets much smoother. Both spouses know the amount of assets that will be transferred. Additionally, the spouse receiving the QDRO can walk away from the divorce knowing they’ve got money saved up for retirement. Additionally, the spouse who transfers the retirement funds from a retirement account doesn’t have to pay a penalty. QDRO transfers are excluded from the 10% penalty you’d normally have to pay for an early withdrawal. The receiving spouse doesn’t have to pay taxes on the transfer, either, as long as the money goes into a qualified plan (IRA or 401(k), for example).
QDRO Limitations
If funds within a retirement account are already part of another QDRO, you can’t access them through a QDRO. This could become an issue if your spouse has a QDRO in place from a previous marriage. Also, if children or dependents aren’t included in a retirement plan, then they can’t be added to the QDRO. Additionally, any funds added to a retirement account before you were married aren’t eligible for the QDRO.
