Some people automatically jump to the conclusion they need a QDRO (Qualified Domestic Relations Order) when a retirement plan exists in a marital estate. Yet, is a QDRO needed for every retirement plan in a divorce? How do you make the decision whether to move forward and obtain a QDRO for your retirement plan(s)?

Ultimately, the marital estate is divided based on a negotiated agreement between the two parties. Yet, there are usually lots of details within a retirement plan that need to be reviewed to uncover the risks that may hide in the language. The decision to split a retirement plan 50/50 may speak to the expectation of asset allocation or future distributions. Yet, there is more to the decision than just splitting the assets in half and the details can make a difference. These details determine whether or not you need a QDRO for your divorce.

By way of background, the primary purpose of a QDRO is to allow one or both spouses to become a participant of the other spouse’s retirement plan. In order to become a participant the administrator of the plan needs to approve the QDRO which is a separate process unto itself and beyond the scope of this article.

Here are some questions to think about to determine whether you need a QDRO for your divorce.

  • Is the size of the assets in each retirement plan worthy of creating a QDRO? There is an expense to create a QDRO. There may be another option to divide up the assets in the marital estate.
  • What is the cost basis of each retirement plan?
  • What are the tax implications of future distributions to each participant?
  • How might the retirement plan be divided?
  • Are the retirement plans invested in the same investments? If not, what is the difference in exposure?
  • How stable are the investments of each retirement plan?
  • Are there certain restrictions within the each plan that could constrain future distributions?
  • Is there a risk that one retirement plan is not fully funded from the corporation? What happens under these conditions?

Evaluating whether you need a QDRO requires a financial expert — skilled in the art of divorce — to review the rules and constraints of the retirement plan. Through the review the financial expert will inform you whether you need a QDRO, specifically identifying whether any potential risks or opportunities need to be addressed.

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