A Guide to QDRO Accounts

Suppose you are recently divorced or going through the process. In that case, you may be wondering about a term used to describe a type of asset created during the proceedings by the court known as a Qualified Domestic Relations Order (QDRO) account. But what is a QDRO account, and how does it work?

What is a QDRO account?

A QDRO account is a retirement plan awarded to an alternate payee, most commonly during divorce proceedings, through a court-issued Qualified Domestic Relations Order (QDRO). The court specifies the percentage or dollar amount each ex-spouse will receive, ensuring a fair division of marital assets.

While ex-spouses are the usual recipients of QDRO accounts, minors or other dependents can also be beneficiaries. Recipients do not pay taxes upon receiving the funds and only incur them at the time of withdrawal, if applicable. For example, Roth withdrawals would not be subject to taxes if the money has been in a retirement plan for the minimum five-year period.  

While QDROs are commonly created from 401(k) plans, courts can create them from pensions and 403(b) plans. However, QDRO rulings only apply to employer-sponsored retirement plans. Traditional and rollover IRAs, as well as state-managed plans, adhere to different legal standards.

Characteristics of QDRO Accounts

When receiving a Qualified Domestic Relations Order (QDRO) account, recipients can withdraw funds at any time without penalty and regardless of age.

Unlike IRAs, which generally offer greater discretionary investment choices and have fewer governing rules, QDRO accounts must adhere to the specific rules and investment options of the employer's retirement plan they were created from. For instance, if a 401(k) plan only allows one-time distributions for QDRO accounts, recipients must withdraw all funds in that transaction.

Withdrawn QDRO funds that are not redeposited into a qualified plan are taxed as ordinary income, while exceptions exist for Roth balances and net unrealized appreciation gains (a topic for a future post).

Plan Administrators Can Reject QDRO Rulings

While rare, plan administrators can reject a Qualified Domestic Relations Order (QDRO) if it conflicts with plan rules. It's advisable to consult an attorney experienced in QDROs to minimize the risk of rejection.

Rejections happen because ERISA-governed plans cannot execute measures that contradict their governing documents. If a rejection occurs, the involved parties must work with the court to resolve the issue and ensure compliance before the QDRO can be reissued.

QDRO Values Can Fluctuate Before Receiving Them

Notably, QDRO accounts can decrease in value after a court creates them since the money in the 401(k) plan remains invested according to the original account holder's choices until accessed by the new payee. While frustrating for recipients, know that the values can and will change depending on market conditions.

Once a QDRO has been received, the recipient should select new investments suitable for them.

In Closing

QDRO accounts, or Qualified Domestic Relations Orders, are retirement accounts that allow ex-spouses and dependents to access savings for a smoother transition after divorce.

While divorce can be difficult, it doesn't have to be contentious. Courts use QDRO rulings to assess each person's contributions to the marriage and ensure a fair division of wealth.

If you are receiving a QDRO account and are unsure what to do next, we are here to help. Our team at Lundeen Abrams Advisors is experienced in handling divorce and QDRO accounts, and we can help you chart a new path forward with your new nest egg.

Please reach out to us to schedule a consultation, and we will begin the collaborative process of creating a withdrawal and investment strategy tailored to your needs. We will look forward to talking with you soon!