Do I need a QDRO for dividing retirement assets in my divorce?
If you are in the process of divorce, you may have heard the term qualified domestic relations order, or QDRO, and wondered if it will apply to your case. Courts issue these orders to allow for the division of certain retirement plans as part of the property division in a divorce proceeding. The order tells the plan administrator to divide the property according to the divorce decree for the ex-spouse, who will become an “alternate” payee on the account, while protecting the account holder from early withdrawal penalties.
State and federal laws control when and how to use a QDRO. Below are answers to a few questions you may have regarding QDROS and the division of retirement accounts in divorce.
Will we have to divide our retirement accounts?
Under California law, you will both disclose all of your assets acquired during your marriage as part of the property division phase of your divorce, including your retirement assets. The court then attempts to divide this community property between you as evenly as possible.
If you and your spouse can create a property settlement agreement on your own, the court will most likely approve your plan. You may be able to create a plan that divides your total assets without having to divide your retirement account. For example, if you both have your own 401(k)s, perhaps it makes sense for you to keep them and exchange other investments, cash assets or real estate, instead.
What types of retirement assets need a QDRO?
People have a wide variety of retirements assets, but the most common include:
- Pension plans
- Individual retirement accounts (IRAs)
- Employee stock ownership or profit-sharing plans
Many employer-based plans will need a QDRO. Certain military and government pension plans do not use QDROs, however, and have their own division process, which is quite complicated. In addition, private IRAs do not require a QDRO.
How do I request a QDRO?
The court may not automatically issue a QDRO as part of your divorce decree. Your attorney will most likely have to file a separate petition after the divorce is final. The court will use your property settlement as the basis for the QDRO, which then goes to the plan administrator.
A QDRO is not a simple document and any mistakes could be quite costly. It is also not a neutral document, so you want someone looking out for your best interests during the process. Depending on your situation, you may not only want to hire an attorney experienced with drafting QDROs but also engage a financial professional such as an accountant.