What Is a QDRO? | Family Finance
If you hear the term QDRO, you’ll know that you’re a full-fledged grown-up.
It’s an abbreviation you’ll often hear from a judge in a divorce court, or perhaps your attorney will bring it up. QDRO stands for qualified domestic relations order. So if you have heard those letters lately but know next to nothing about what QDROs are, read on.
What Is a QDRO?
It’s a court order. Judges use it to split up certain types of retirement plans, like a 401(k), into two equal parts for a divorcing couple. Not every retirement plan, however. For instance, a legal order called a “transfer incident to divorce” will carve up an IRA, or individual retirement plan.
You’ll usually get a QDRO if you and your spouse share a private pension plan, the aforementioned 401(k), a 403(b) plan, a 457 plan, employee stock ownership plans (known as ESOPs) or a defined benefit plan.
Generally, a QDRO is carved up to make sure both parties in a couple get equal shares of money from the retirement benefits you’ve accumulated through your marriage.
That said, sometimes in a contentious divorce, the court could designate half of the retirement assets to go toward alimony or child support if one member of the couple can’t fulfill his or her financial obligations (or isn’t attempting to).
How Much Does It Cost to Prepare a QDRO?
There isn’t a clear-cut answer. It all depends on how much of a retirement portfolio you have, what your assets are and so on. But it can generally run a few hundred dollars on the low side and into the low thousands, like $2,000, on the higher end. Frequently, your divorce attorney won’t actually prepare the QDRO. That will be done by an actuary or a company that specializes in putting together QDROs. But your divorce or family law attorney, if they don’t do that, can put you in touch with a professional who does that work.
Benefits of a QDRO
There are a few reasons to consider creating a QDRO. Some of the main reasons include:
General fairness. One of you may have earned most or all of the money, but the other married partner presumably did his or her part, raising the kids or pets and keeping the household together. In most cases, you both probably have a pretty good argument for getting half of your retirement assets.
Less stress down the road. “QDROs are important because they help to avoid conflict over the division of property oftentimes years or decades after a divorce,” says Stephen Cawelti, divorce attorney and owner of Cawelti Law in Los Angeles. “Too often, couples enter their divorce judgment and then forget to do the QDRO, which is a separate order that just applies to the retirement asset.”
Look at it this way: You may or may not think the world of your soon-to-be ex right now, but – especially if you have children – you’re going to want an amicable relationship going forward. If you don’t have a QDRO, you or your ex-spouse may come to regret not getting one. If you’re the one with the lion’s share of the retirement assets, your ex could regret it so much that you’re invited to discuss your retirement assets in court. If you’re the one who doesn’t have many assets, meanwhile, that either means you could have a future retirement in which you struggle or have to hire an attorney.
Getting a QDRO now can help ensure that you and your ex have a healthy relationship in the future.
Fewer tax problems. “Normally, money removed from a qualified plan is taxed at ordinary income rates and could be subject to a 10% penalty as well,” says Beth Logan, an enrolled agent and owner of Kozlog Tax Advisors in Chelmsford, Massachusetts.
How Does a QDRO Work?
“The QDRO allows the money to be moved from the account holder’s qualified retirement plan account to the spouse’s retirement account without any taxes due until the money is distributed later,” Logan says. “If the spouse wants the money as cash – not as part of their retirement – or moved to a Roth IRA, then the spouse will have to pay the taxes on the money. The QDRO will eliminate the 10% penalty for the withdrawal.”
That can be a helpful thing, too, if you feel you can afford to take that cash from your future retirement. You may need the money as cash to, say, buy a house after a divorce, and not having to pay a 10% penalty is something that comes courtesy of the QDRO.
How to File a QDRO
The main rule here: Don’t do it yourself. Hire somebody who specializes in this sort of thing.
“Unless you’re a serious DIYer with nothing but time on your hands, it is not something I would ever advise someone to attempt on their own,” Cawelti says, adding that it can take months or even years (especially if you’re doing it yourself) to put these together.
He has a point. There’s a lot to filing a QDRO. For instance, if you were to draft a QDRO by yourself, would you know to make sure that it adhered to ERISA guidelines? ERISA stands for Employee Retirement Income Security Act.
Kellie Rahl-Heffner, a family law attorney at Gross McGinley LLP, in Allentown, Pennsylvania, paints quite a picture of how many steps there are – after the QDRO is put together, let alone putting it together.
“Once the QDRO is drafted, it must be signed by all parties and taken before the judge for signature making it a court order. That order is then sent to the retirement plan administrator for processing. They will divert the enumerated funds to the alternate participant’s account,” she says.
Do I Need a QDRO?
It really depends what you and your spouse have to split. If you both share a retirement account that has $700 in it, then maybe it’s not that important (still, check with your attorney and see what he or she says).
If you have considerable assets saved for retirement, then it’s hard to make an argument that you don’t need one. And that, as duly noted, is as good a reason as any to prepare a QDRO – to avoid a lot of heated arguments in the future.