The average American household has approximately $87,000 saved for retirement across various accounts, and these accounts are often involved in family law disputes. However, early withdrawal from these retirement plans can result in significant taxes and penalties.
In certain family law matters, particularly divorce, a Qualified Domestic Relations Order (QDRO) is essential. A QDRO is a legal order that recognizes an alternate payee’s right to receive a portion of the retirement benefits from a plan participant. Without this order, transferring or withdrawing funds from the account could be costly and legally problematic.
When Do You Need a QDRO?
One of the most common scenarios requiring a QDRO is divorce. In Washington State, assets acquired during a marriage are typically considered community property and must be divided equitably between the spouses. The court generally totals the value of all community property and divides it equally.
Often, a retirement account, such as a 401(k), is among the largest marital assets and needs to be divided. Each spouse will leave the marriage with a designated portion of the account.
For example, consider John and Sarah, who were married for 15 years. During this time, John’s 401(k) grew to $200,000. The couple has additional savings but no real estate assets. During the division of community property, the court awards Sarah $40,000 from John’s 401(k), leaving John with the remaining $160,000.
A QDRO is necessary to establish Sarah’s legal right to $40,000 from the account. Since she is neither a plan participant nor a designated beneficiary, the retirement plan administrator will not transfer any portion of John’s 401(k) to her without a valid QDRO.
While dividing community property is the most common reason for a QDRO, it may also be required in other family law matters, such as to fulfill child support obligations.
Where Do You Get a QDRO?
A QDRO is obtained through the court handling your divorce. The court can issue the order directly or formally approve a proposed property settlement agreement that includes the QDRO.
A QDRO must contain specific information, including:
- The names and mailing addresses of both the plan participant and the alternate payee.
- The name of each retirement plan the QDRO covers.
- The percentage or dollar amount to be paid to the alternate payee.
- The number of payments or the time period the order applies to.
It is equally important to avoid including prohibited provisions, such as requiring the retirement plan to provide benefits or options not originally available under the plan. For this reason, working with an experienced family law attorney is essential to ensure the QDRO is correctly drafted.
After submission, the retirement plan administrator will review the order to confirm it qualifies as a QDRO. If the administrator rejects the order, affected parties have the option to challenge the decision in court.
Do You Always Need a QDRO?
Not necessarily. If your divorce does not involve the division of retirement accounts, you may not need a QDRO. For instance, if John and Sarah both had their own retirement accounts and other assets, the court could divide those assets equally without requiring Sarah to receive any portion of John’s 401(k). In such cases, a QDRO would not be necessary.
Call to Speak with an Experienced Family Law Attorney
Dividing community assets, particularly retirement accounts, can be complex and filled with hidden challenges. Amanda J. Cook has extensive experience helping men and women navigate divorce and QDRO-related issues. Contact our office today to schedule a consultation and ensure your rights are protected during this critical process.