Although the U.S. divorce rate is in a steady decline, it’s still one of the highest in the world. And with divorces often come QDROs – “qualified domestic relations orders.” A QDRO is a state court order obtained by divorcing couples that requires a company plan to pay a portion of the benefit of the spouse participating in the plan to the other spouse.
1. What is a QDRO?
A QDRO is a “qualified domestic relations order.” In plain English, it is a state court order obtained by divorcing parties that requires an ERISA plan to pay a portion of a participant’s benefit to the non-participant spouse. QDROs are an exception to the rule that prohibits an ERISA plan from paying benefits to anyone other than a plan participant or beneficiary.
2. Can a QDRO be used for IRAs?
No. QDROs are generally only for ERISA plans, and IRAs are not covered by ERISA. In a divorce situation, IRAs can be split via a divorce decree or property settlement agreement. Funds are transferred through a direct trustee-to-trustee transfer to an IRA in the name of the non-owner spouse.
Many times when individuals divorce the IRA is split between the spouses. This is done through the divorce decree or separation agreement. An IRA is never split using a qualified domestic relations order (QDRO). That is only used for splitting employer plans, such as 401(k)s.
This rumor of Marge and Homer Simpson's divorce made the rounds late last week. It was quickly countered. They are supposedly separating for only one episode. But how would a separation or a divorce affect Homer’s retirement assets?
In this week's Slott Report Mailbag, we answer questions on if money from a QDRO can be directly rolled over into the other spouse's 401(k), the RMD requirements for inherited Roth IRAs, and if the 5-year rule for distributions applies to IRA beneficiaries.
There’s a lot of confusion about the retirement plan and IRA rules. Recently, we were made aware of two cases where the attorneys didn’t know how an IRA should be split in a divorce and incorrectly used the employer retirement plan rules when drafting the documents used to divide the IRA.
This week's Slott Report Mailbag looks at how a QDRO (qualified domestic relations order) works with 401(k) withdrawals and details the IRA beneficiary process. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
If you are in the midst of getting a divorce or you're already divorced, you might be awarded some or all of your ex-spouse's company retirement plan funds, such as a 401(k) plan, as part of the property settlement. If so, there are a few things you need to know before you get those funds. We detail these below.
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