It is no secret that getting a divorce can be financially detrimental—especially to women who are divorcing men. Many women experience a lower standard of living after divorce, and about 20% fall to the poverty level. If you haven’t been working outside the home, or have gaps in your work history, it’s especially important to understand what a QDRO is and how it can help protect you financially. Divorcing your spouse does not mean that you are divorcing your money too. Regardless of whether you will making or receiving payments as the divorce finalizes, a QDRO can help protect you.
What is a QDRO?
A Qualified Domestic Relations Order, or QDRO, is a court order recognizing that an individual is entitled to a part of their ex-spouse’s retirement plan. Essentially, it is a property settlement of the marriage assets that involves a retirement plan. Often, divorce settlements award 50% of the value of the assets acquired throughout the duration of the marriage to the spouse. Other factors, such as length of marriage, which can affect the exact amount that you might be eligible to receive.
Any retirement plan covered by the Employee Retirement Income Security Act, or ERISA, requires a QDRO. If the QDRO meets specific requirements, the plan’s administrator must approve it.
Why is a QDRO important?
Benefits of receiving assets through a QDRO
Many women, during their marriage, stop working outside the home to care for their children, or even an aging or ill parent. These disruptions not only affect career advancement, but also overall earnings potential and retirement savings. So during the marriage, as a woman may have taken time off work for these situations, her husband maintained his career path with no interruption, thereby advancing his career and receiving regular raises, bonuses, and contributions to his retirement plan. Making a QDRO a part of the divorce agreement allows the spouse to claim part of the assets acquired during the marriage, even if they aren’t directly in their name.
Benefits of distributing assets through a QDRO
For the spouse needing to pay out the assets, it is also beneficial to have a QDRO in place. If you are the paying ex-spouse, a QDRO can shield you from paying taxes on the money that is distributed. As a result, the ex-spouse receiving the benefit will be responsible for taxes incurred on the distributions. It is important to note that QDRO transfers from a retirement account do not incur an early-withdrawal penalty. However, if no QDRO is in place and you find that you need to use retirement assets to pay to your ex-spouse, you are then responsible for the taxes associated with those disbursements, costing you thousands of dollars extra.
Restrictions of a QDRO
There are some things that a QDRO cannot do and your ability to disburse funds will depend on these factors as well. A QDRO is not able to:
- Require increased benefits from the retirement plan
- Give out a benefit that is not provided through the current plan
- Take benefits from an alternative payee covered by a different QDRO and disburse those benefits to a new payee under a new QDRO
- Cover benefits that are a qualified joint and survivor annuity for an ex-spouse and following spouse
Information that must specifically appear on the QDRO
There is certain information that must appear on the QDRO
- Participant and each alternate payee’s name and last known mailing address,
- Amount or percentage of the participant’s benefits to be paid to each alternate payee,
- The name of each plan to which the order is applicable,
- Number of payments (time period) covered by the QDRO.
How do I put a QDRO in place?
To get a QDRO, ask your plan administrator for a the appropriate form. However, be aware that there are several legal aspects to a QDRO. You may want to consult with your attorney to ensure that the details of your specific situation are properly addressed in your QDRO.