Is a QDRO Needed for IRA Funds?


A Qualified Domestic Relations Order, commonly referred to as a QDRO in divorce proceedings, is a specialized court order that separates retirement savings assets. Without the QDRO, an IRA cannot be split with part of the funds going to an ex-spouse and maintaining the tax-deferred structure.

The Process

  • Before the judge can sign off a QDRO, making it an effective court order, both parties must provide full disclosure of assets and determine what is part of the marital estate. Once the marital estate is determined, parties either negotiate the IRA split value or use court-provided calculators. Once the amount is established, the party getting the IRA funds opens a QDRO rollover IRA account.

    She can represent the value a dollar value or a account percentage. The party getting the money can choose any IRA custodian she is comfortable with. Once the new account is established, the QDRO lists both parties names, old account information, the amount moving and where it is going including the custodian's name, address and account number. The signed order is provided to both IRA custodians to conduct the transfer.

QDRO Effects

  • Once the courts sign the QDRO, it is part of the overall divorce order. The amount designated in the QDRO moves to the new IRA custodian. The parties become responsible for their own IRAs. Responsibility includes making contributions, taking distributions and naming beneficiaries. Each party is liable for investment decisions and tax consequences of normal or early distributions.

The Wrong Way

  • A QDRO can take some time to negotiate and put into effect. When going through a divorce, parties might want to expedite the process. In some cases, the IRA owner might take a liquidation of the amount in the IRA and have a check handed to the ex. This is harmful to the parties because the IRA owner is liable for all taxes on distributed amounts, including penalties. The recipient is unable to roll the money into another qualified plan and thus loses tax-deferred growth potential. Whether harm was intentional or inadvertent, the courts do not look favorably on this action.

Case Study

  • John and Jane have been married for 10 years. John has $200,000 in IRA assets. Jane has $100,000. During the marriage, John's IRA grew $120,000 while Jane's grew $40,000. The growth is from both annual contributions and earnings making $160,000 part of the combined marital estate. Divorce proceedings result in a 50/50 split of the marital assets, meaning each party should have $80,000 of the growth. Jane needs to open a second IRA, the QDRO rollover with $40,000 transferred once the order is completed.

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