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What is a qualified domestic relations order?

On Behalf of | Jul 30, 2021 | Blog, Divorce |

Gray divorce rates, meaning divorces between couples 50 are older, are on the rise. In addition to the emotional turmoil that results from leaving your spouse after many decades spent together, gray divorces are also more challenging from a legal perspective. This is especially true when dividing retirement funds.

According to U.S. News & World Report, a qualified domestic relations order (QDRO) is a court order used to divide retirement plans between divorcing spouses. Older divorcing couples must understand QDROs and how they work to ensure they receive the proper compensation to move forward with their lives.

How do QDROs work?

Dividing retirement accounts is more complex, as there are tax implications that can occur. A QDRO enables the spouse holding the retirement account to deposit funds into their former spouse’s account, and these funds are not taxed until a withdrawal occurs. The account holder can also provide cash or place funds into a Roth IRA, which does incur taxes. However, the 10% early withdrawal penalty will not apply.

Why should you use one?

QDROs create a solid plan for dividing retirement assets. Without one, the account holder is under no obligation to provide funds to the ex-spouse. This can mean significant financial instability after divorce, especially if you were a stay-at-home parent for the majority of the relationship and lack sufficient job experience. QDROs also ensure the fair division of retirement funds, as the court creates legal orders with absolute fairness in mind.

All QDROs must comply with standards set forth by the Employee Retirement Income Security Act. Additionally, QDROs are not used with all retirement accounts. For example, splitting a Roth IRA requires another type of court order known as a transfer incident to divorce.