Common Questions About QDROs

Common Questions About QDROsCouples going through a divorce often hear the term “QDRO” and feel confused about what it means. QDRO stands for Qualified Domestic Relations Order, and it is a very important document that establishes how an individual’s spouse, ex-spouse, child, or other dependent will receive part of the money or benefits in their retirement account.

Even though it is important to know and understand that you must have this document in order to split your retirement assets, there are several other questions that individuals frequently have about QDROs. We want to address some of the most common questions our Franklin divorce lawyers hear.

What is in a QDRO?

A QDRO lists the name and address of the participant and payees, the retirement plan name, the percentage or amount of money expected to be paid to the payees, when the money is expected to be paid, the plan for when the participant or payee dies, and the plan if the retirement plan is no longer active or has ended.

What types of retirement plans are subject to a QDRO?

You can use a QDRO to divide a 401(k), 403(b), 457(b), or a pension. There are other types of “qualified retirement plans” that may be subject to a QDRO, like stock ownership plans and certain annuities, so you’ll want to bring all your paperwork with you to your consultation.

IRAs, however, are NOT subject to division in a QDRO.

How long does it take to receive funds from a QDRO?

This is one of the most frequent questions asked by clients. However, the answer that we usually give is that “it depends.” It can take a few weeks, or it can take several months to receive funds from a QDRO. Sometimes, it is even possible for individuals to receive their money immediately after it is approved.

However, it is important to know and be aware of the fact that there can be many issues that arise along the way, causing your experience to take longer than others. A few of these issues may include your ex-spouse failing to cooperate, the court being backed up, or the retirement plan simply taking some time to be approved.

What if my ex-spouse refuses to sign the QDRO?

Most individuals do end up agreeing to sign after having their questions and concerns addressed. Some kick up a fuss first, but in the end it’s usually resolved. Truth be told, it’s often the other spouse’s lawyer or financial advisor who discourages them from signing, because the value can fluctuate if you have a 401k or other stock-dependent retirement account.

If your ex-spouse refuses to sign, then we go to the Court. We can enter a motion to have the clerk sign on his or her behalf.

Do I lose my ex-spouse’s pension if he or she dies?

If the QDRO is not already in place, then yes – you could.

The general rule of thumb is to submit your QDRO at the same time as your judgment of divorce. While you do have the option to submit a QDRO later on, you may experience more issues than if you would have submitted it with your judgment of divorce. For example, if your ex-spouse becomes sick and passes away before you have submitted the QDRO, you will not be entitled to his or her pension. You should complete and submit your QDRO at your earliest opportunity to ensure that you do not lose out on these funds in case a similar scenario arises.

Are QDROs a requirement in the divorce process?

QDROs are not a requirement in the divorce process.

Are there penalties for early withdrawal for a QDRO?

No, there aren’t. But you may face additional taxes based on what you do with that money. Investopedia explains it well:

Assets distributed from a qualified plan under a QDRO are exempt from the usual 10% early withdrawal penalty.

Recipients can opt to have a portion of the amount processed as a direct rollover to their traditional IRA and the balance paid to them to buy a home. The amount processed as a direct rollover to an IRA will not be subject to withholding tax.

However, the qualified plan assets received under a QDRO are rollover-eligible, and any amounts that are paid directly to the beneficiary instead of to an eligible retirement plan will be subject to mandatory withholding tax. This withholding can include 20% for federal taxes held by the plan and an additional amount for state taxes, depending on the state.

In Tennessee, if you are under the age of 59 ½ and you do not opt for a direct rollover, then you WILL be subject to an additional 10% income tax. (Various exceptions apply, which we can explain during your consultation.)

However, you can claim the withholding amount on your federal tax returns. If you want to avoid paying taxes, you can roll over the funds directly to your own retirement account or IRA.

Who is legally allowed to be the QDRO alternate payee?

Only spouses, ex-spouses, children, and other dependents are allowed to legally be the QDRO alternate payee. This means that if you are not the account holder’s child, spouse, former spouse, or another dependent (stepchild, adopted child, or any other person who relies on the individual for financial support), you cannot be the QDRO alternate payee.

If you have other questions regarding a QDRO or need legal guidance about your retirement accounts in a divorce, the Law Offices of Adrian H. Altshuler & Associates is here to assist you. Our Franklin divorce attorneys have been helping couples with the QDRO process for more than 30 years, and we are happy to help you as well. Please call our office or submit our contact form to schedule consultation. We maintain additional offices in Brentwood and Columbia for your convenience.