What Is a Qualified Domestic Relations Order During Divorce?

How to Set Up a QDRO

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A qualified domestic relations order, or QDRO, is a domestic relations order that needs to be included in a divorce settlement agreement when dealing with pension funds. The QDRO establishes your soon-to-be ex-spouse's legal right to receive a designated percentage of your qualified plan account balance or benefit payments.

Since your ex-spouse becomes entitled to this money, he or she will also be responsible for paying the related income taxes when that money is received in the form of a pension, annuity or withdrawals.

In effect, your ex becomes a co-beneficiary of your existing qualified plan pension account.

Also, the QDRO arrangement permits your ex to withdraw his/her share and roll the money over into his or her own IRA to the extent current withdrawals are permitted by the terms of the qualified retirement plan. The IRA rollover procedure allows your ex to take over management of the money while continuing to postpone taxes until funds are withdrawn from the IRA. Once again, the important point from your perspective is that your ex will be the one who owes the taxes.

What Happens When Qualified Retirement Account Money Goes to Your Ex Without a QDRO?

Without a QDRO, qualified retirement account money awarded to your ex is treated as a taxable distribution to you. This means you owe the IRS for money that actually winds up in your ex's pocket. It's a tax-free windfall at your expense. In addition to the income tax bill, you may also get stung with the 10% premature withdrawal penalty if you are under age 59 1/2.

What Information Do I Need to Have in My Divorce Decree?

  • Name and mailing address of the "plan participant" (you) and the "alternate payee" (your ex)
  • Each retirement qualified, plan account to be split up under your divorce
  • The name of each plan to which the order applies
  • The dollar amount or percentage of benefits to be paid from each account to the alternate payee
  • The number of payments or benefits period covered by the QDRO
  • Your papers should also specify that a qualified domestic relations order is being established under your state's domestic relations laws and Section 414(p) of the Internal Revenue Code.

You should consult a tax professional with divorce case experience to make sure all the required bells and whistles are included. Obviously, this must happen before the divorce papers are finalized. Do not assume your divorce attorney is well versed in QDRO matters.

If you need money to live on now, you can elect to have the funds transferred from your spouse’s retirement plan directly to you, rather than transferring them to an IRA. You will have to pay tax on the money you receive, but there won’t be any 10% penalty if the money comes from a retirement plan other than an IRA.