What is a Qualified Domestic Relations Order?

Spouses in Texas who need to split a retirement account during a divorce should learn about the QDRO.

Anyone who has faced the prospect of splitting retirement accounts in a divorce may know that there are many caveats associated with this. Texas residents that have to divide 401K accounts can find this process complicated and wrought with unexpected penalties if they are not careful. By using a Qualified Domestic Relations Order, many negative financial implications can be avoided.

What can happen without a QDRO?

Distributions from a 401K that do not meet retirement qualifications or to persons other than the original account holder can be subject to taxes and early withdrawal fees. This can happen even if the transaction takes place at the direction of a judge or court. A Forbes article gives an example of this exact situation.

A divorce court judge instructed a man to use funds from his 401K account to pay alimony to his former wife. The total amount taken from the account was just slightly less than $53,000. Because there was no associated Qualified Domestic Relations Order on record, the man was required to pay close to $5,300, or ten percent of the total taken, in taxes.

What exactly does a QDRO do?

The U.S. Department of Labor website explains that a Qualified Domestic Relations Order legally establishes an alternate payee for a designated retirement fund. Looking at the example above, the wife would have been identified as an additional payee on the 401K account. This would have prevented any taxation on the husband for the distribution.

The Internal Revenue Service website notes that former spouses and dependents are the only persons allowed to be listed as alternate payees via a QDRO. The order can be used to pay alimony or to split a retirement account as part of a divorce property settlement. It can also be used to pay child support ordered by a court. For any property division agreements, the receiving spouse will not be ordered to pay taxes so long as the money is reinvested into another retirement account.

Proper procedure matters

When working with a Qualified Domestic Relations Orders, it is important to provide all details about the alternate and the distribution. This includes the total amount to be paid out, the date of any payment and if there will be multiple payments.

It is recommended that anyone getting a divorce in Texas check with an attorney to learn how or if a QDRO will be necessary or beneficial to them.