During the division of property in a divorce, it is sometimes necessary to divide up the couple’s shared retirement savings. But retirement accounts such as 401(k)s, 403(b)s and IRAs have tax consequences and penalties if you withdraw the money before retirement. Is it possible to divide these assets without incurring the penalties and taxes?
Yes, but you will need a qualified domestic relations order, or QDRO. (Often pronounced “quad-row.”) This is a court order authorizing the account or plan administrator to divide the account so that you don’t incur the penalties or tax consequences.
In a divorce, when you and your divorcing spouse identify assets that need to be divided, the court will award the asset, or a percentage of the asset, to one party or the other. In order to make the transfer, however, the court will need to issue a QDRO that meets the plan’s requirements.
Generally, your divorce attorney or your ex’s lawyer will draft the QDRO and propose it to the court. If there is no objection, the court will generally use the QDRO the attorney drafted.
The spouse who is the plan participant will then present the QDRO to the plan administrator. Next, the plan administrator makes sure that the QDRO meets the plan’s requirements and either notifies the plan participant that it has been accepted or provides an explanation of why it was not, along with action steps.
You should get your QDRO drafted as soon as possible
Ideally, you would want to get the QDRO issued as soon as possible, before the divorce is even finalized. This gives you an opportunity to make changes if the order turns out not to meet the plan’s requirements for any reason. You can go back after your divorce to get a new QDRO, but it is best to do so while your case is in progress rather than having to reopen the process.
Additionally, your right to receive a share of the retirement accounts could be jeopardized if your ex retires or dies before you have the QDRO in place.
A QDRO isn’t an automatic part of a divorce. You have to ask for it as part of your property settlement. Therefore, it is important to make sure your attorney understands that you will be dividing retirement assets before you finalize your settlement.
If you have questions about how retirement assets are divided or when a QDRO is necessary, talk to your divorce attorney.