Qualified Domestic Relations Orders (QDRO)
What is a QDRO?
A Qualified Domestic Relations Order, or QDRO for short, is a formal Court Order that is used to transfer retirement accounts from one spouse to the other as part of the divorce proceedings.
Why Would I Need a QDRO?
If you are getting divorced, in order to equitably divide the marital assets, it may be necessary to transfer the retirement assets (for example a 401(k); IRA; or pension) from one spouse to the other. By using a QDRO, the plan administrator (the company that holds the retirement account) is Court Ordered to transfer a certain amount of the retirement account to the other spouse. By utilizing a QDRO, there are no tax consequences to either the paying spouse for withdrawing the funds early; or to the receiving spouse for receiving the funds as the transfer is not treated as income to the receiving spouse so long as the assets are transferred to a retirement account for the receiving spouse.
How Does a QDRO work?
Once either a specific dollar amount or what percentage of the retirement account assets will be transferred to the other spouse has been determined (either by agreement of the parties or by a court Order), either the attorney or an actuary will prepare a QDRO. The QDRO will specify the portion of your retirement plan to be transferred, as well as to whom it will be transferred, and other specifics depending on your circumstances. The QDRO will either direct the plan administrator to immediately transfer funds, or in the case of a pension, to pay the receiving spouse a portion of the paying spouse’s pension benefit when the paying spouse begins receiving the benefit.
After the QDRO is prepared, both parties will sign it to state that the terms of the QDRO represent the proper terms that have been reached during the divorce proceedings. Once the parties have signed the QDRO, it will then be submitted to the Judge for the Judge to enter the QDRO as a formal Order. Once the QDRO is signed by the Judge, it will then be sent to the retirement account’s plan administrator for processing of the retirement funds.
What are the Benefits of a QDRO?
The primary benefit of a QDRO is the tax treatment. Normally, the owner of a retirement account cannot withdraw the funds from his or her retirement account before attaining the age of 59 ½ without incurring a 10% penalty and without having to pay income tax on the money taken out of the retirement account. Because the retirement account assets are “marital assets” the QDRO is used to simply transfer the marital assets from one spouse to another. Because the account owner is not actually withdrawing the funds for his or her own personal use, the withdrawal is not taxed to the account owner, nor is the account owner penalized for the withdrawal.
By the same token, the spouse who is receiving the funds is not taxed on receiving the retirement funds as long as the funds are transferred to another “qualified plan.” This means another retirement account such as a 401(k), IRA, etc. When the receiving spouse does withdraw funds from the new “qualified plan,” however to use as income, the funds will be taxed as income to that spouse.
If the QDRO is used to pay the receiving spouse a portion of the other spouse’s pension, the pension income is taxed upon receipt. The receiving spouse is not entitled to receive the pension benefits any earlier than the paying spouse.
From our offices in Camp Hill, we represent clients in divorce courts in Dauphin County, Cumberland County and York County. Call us at 717-836-0471 or use the email contact form to arrange a consultation with one of our attorneys at your earliest convenience.