Retirement and Divorce – Pension, 401(k), IRA and QDROs

November 26, 2012 | By Steven DiGregorio

You and your soon-to-be ex-spouse have both saved and invested for the long-term within retirement plans, accumulating sizable nest eggs. But what is going to happen if you should become divorced? Will will own the assets and how?

In a divorce, the former spouse and dependents may be entitled to a portion of the retirement assets as part of the divorce settlement. If this is the case, the settlement may include what’s know as a qualified domestic relations order (QDRO). This order outlined by the IRS code that defines the what, when, and how the division of 401(k) or other retirement plan assets will occur.  It is a court judgment or order that names someone other than you as the recipient or owner of the retirement assets. This other person or recipient is known as the alternate payee and may be your spouse, your child, or another dependent.

The benefit to using a QDRO as part of the settlement is that the money moved from the retirement account is not subject to the 10 percent early withdrawal tax penalty, even if you and your alternate payee are both younger than age 59 1/2.  But take warning, if the QDRO is not properly executed on, you will be subject to that early withdrawal tax penalty. In the midst of divorce and the distribution of these assets to other parties, the last thing you want to face is a tax on money that is no longer yours. 

Ensuring the Validity of a QDRO

Divorce Planning

Divorce Planning

In order for a QDRO to be valid, it must meet some legal requirements. It must be correctly created and it must be adequately verified. Checking the status of your QDRO at both stages is wise to ensure that your QDRO is acceptable under the law. If this seems like a lot of trouble, keep in mind that aside from preventing undo taxation, the other reason why such checking and double-checking takes place is to prevent someone from illegally accessing your retirement assets.

Creation of the QDRO

To be considered a QDRO, the division of your assets must first and foremost be directed by a court order issued in compliance with state laws. The IRS code states that the QDRO must  include the following information to be valid:

  • Your name and your last known mailing address.
  • The name and address of your alternate payee.
  • The amount or percentage of the account to be transferred to your alternate payee.
  • The manner in which the amount or percentage is to be determined.
  • The number of payments or period to which the order applies.
  • The plan to which the order applies.

Verification of the QDRO

If your 401(k) plan assets are subject to a QDRO, you must provide your plan administrator with either the original court order or a court-certified copy of your QDRO document. Your plan administrator will then follow formal procedures to establish the legality of the QDRO and put it into motion. These procedures are part of the rules set down in your 401(k) summary plan description (SPD), and by law they must include:

  • Notifying you and the alternate payee that the order was received, and detailing the procedures that will be followed to verify the order.
  • Determining within a reasonable period of time whether the order is valid QDRO.
  • Accounting separately for any amount payable to your alternate payee during the evaluation period.
  • Notifying you and your alternate payee whether the QDRO is valid.

A QDRO Case Study

In a famous case, a man paid out $1 million dollars from his retirement plan as part of his divorce settlement. The man assumed that the order was a QDRO, but missed several key elements that caused the order to be invalid. First, the man’s former wife was not identified as the alternate payee. Second, the order did not include the name or address of the alternate payee. Third, the man did not follow proper procedure for verifying the order.

Because the man was the administrator of the retirement plan in question, he argued that he did not need to file forms with himself, and that the order did not need to include the name and address of the alternate payee because he was personally aware of the details. The IRS did not agree, and deemed the settlement payment an early distribution, subject to the 10 percent early withdrawal federal income tax penalty. This error cost him $100,000.

The Division of Funds in a Divorce

How your funds are divided relies in part on the state in which you live. In most states, your assets are subject to equitable distribution during a divorce settlement. This means that 401(k) assets accumulated during your marriage probably, but not necessarily, will be divided 50-50. Other factors, such as the division of the rest of your marital assets, the length of your marriage, or what each of you contributed to the marriage will also play a part in the decision. However, if you live in a state with a community property law, you may face an equal split in your 401(k) assets regardless of the other division of marital assets. Following is a list of states that presently include the community property law:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

What to Do with QDRO Assets

If you have recently gone through a divorce and will receive money from your former spouse’s 401(k) plan, you have options.

  1. Take the money in cash which can be useful to get through the rough divorce period. But if you receive a lump-sum distribution you will have to pay taxes on the entire amount immediately and will lose the investing and earning power of that money for the future.
  2. Leave the money in your former spouse’s 401(k) plan. If you would like to leave it in the 401(k) plan, you can make this stipulation part of the QDRO agreement. When the money is divided, the plan’s administrator will create a separate account for you. You may not be able to add to this account or withdraw from it until your former spouse withdraws his or her money at retirement, but you will be able to manage the investments of this money and keep it safely tax-sheltered.
  3. Roll over the assets to your own IRA plan. If you would instead prefer an account in which you can make contributions, rolling the money into an IRA is the best option. Transferring the money into an account not connected with your former spouse also provides you with more freedom as you are allowed to withdraw the money at your own discretion.

This legal issues surrounding the use of and the execution of a Qualified Domestic Relations Order are numerous and far-reaching. You will find great value when your attorney works with an employee benefit plans specialist in the drafting and execution of the QDRO agreement.  This is the first step in planning your financial future, make it a good one!

For more information contact Compass Asset Management Group, LLC at 845.563.0537 or

The information herein contained does not constitute tax or legal advice. Any final decisions or actions should not be made without first consulting a CPA, Accountant or attorney.

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Tags: 401(k), alternate payee, divorce planning, IRA, marriage, pension, plan administrator, QDRO, qualified domestic relations order, retirement, retirement plan, SEP, settlement, splitting assets

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STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
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