A qualified domestic relations order, (QDRO) is part of the asset dividing process during a divorce. As a judicial order, it legally stipulates how retirement and pension plans get divided.
Only private sector investments and pensions under the Employee Retirement Income Security Act (ERISA) qualify to use the QDRO as part of an asset split due to divorce. Military and other state and federal government retirements have their legal processes for dividing retirement and pension assets.
The ex-spouse of the person holding the retirement account or pension is considered the “alternate payee” for the split, but there are also other persons that can qualify as an alternate payee on the QDRO. A child or other dependent can also get designated as an alternate payee. The difference, however, is that any QDRO distribution to a child or other dependent gets taxed.
QDRO’s are scrutinized by pension representatives to ensure that they are applicable under the plan in question. These orders can be used as a way to provide for spousal or child support in addition to the division of assets.
Tax Considerations for Ex-Spouses
When an ex-spouse has a QDRO to receive a part of a retirement account such as an IRA or 401(k), they gain the same rights and rules of the investment as the original holder of the investment. This means that distributions from the account are necessarily tax-free. It does mean that the assets can be rolled over into another qualified retirement account without the penalty of taxation.
Asset division during a divorce is a serious affair that will most likely have an effect on your financial situation for the rest of your life. When negotiating a divorce settlement, look to an experienced family law attorney to explore all avenues for the most advantageous settlement possible.