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What is a QDRO?

Jan 6, 2021 | Divorce

Having a robust retirement plan or pension can provide critical security for the future. However, if you get divorced, the split can leave you feeling incredibly vulnerable concerning your post-divorce and retirement financial status.

If you have a retirement account or pension and are going through a divorce, you should know what a qualified domestic relations order (QDRO) is and why it may be critical to dividing these assets.

Dividing pensions and retirement contributions

Backing up, we should explain that in Texas, retirement accounts like a 401(k) are separate property if parties have them before marriage. However, any contributions made to these accounts during the marriage are typically considered community property.

As such, in a divorce, retirement accounts are often eligible for division per state property division laws.

Because it can be very costly to withdraw money from a retirement account early, you can secure a QDRO from a state court or agency to protect each person’s share of the account until the time comes to cash out.

How a QDRO works

A QDRO assigns an alternate payee for a retirement account. In a divorce, this payee would be the non-contributing spouse. This alternative payee will receive a specific portion of the payout from the plan administrator. Understand that when calculating the percent or amount of the money that will go to an ex, it will only include the contributions made during the marriage.

Depending on the order, plan administrators may release funds to the alternate payee right away, roll them into another account or distribute them when the owning party retires (or is eligible to retire).

Important considerations

A QDRO may not be necessary in all cases. For instance, if both spouses have individual retirement accounts that are roughly equal, there may be no reason to divide either plan.

Parties could also work out an arrangement where the party that would receive a portion of the account instead receives property of equal value. In other words, instead of receiving $50,000 in a retirement plan, a person might keep a boat.

Keep in mind that numerous details will dictate whether a retirement account or pension is eligible for division, how it will be divided and what parties can do to streamline the process. Thus, having legal guidance can be critical.