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401(k) & Qualified Domestic Relations Orders (QDRO)

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An exception to the 10% penalty on distributions from a qualified plan (but not an IRA, an IRA is split via a transfer incident to a divorce, which is not an automatic exception) Qualified Domestic Relations Order, or QDRO (cue-DRO).  A QDRO is often put into place as part of a divorce settlement, especially when one spouse has a qualified retirement plan that is a significant asset.

What happens in the case of a QDRO is that the court determines what amount (usually a percentage, although it could be a specific dollar amount) of the qualified retirement plan’s balance is to be presented to the non-owning spouse.  Once that amount is determined and finalized by the court, a QDRO is drafted and provided to the non-owning spouse. This document allows the non-owning spouse to direct the retirement plan custodian to distribute the funds in the amount specified.

In the case of a QDRO, the owning spouse will not be taxed or penalized on the distribution.  In addition, if the non-owning spouse chooses to roll the distribution into an IRA, there would be no tax or penalty on that distribution to her either.  If the non-owning spouse chooses to use the funds in any fashion other than rolling over into another qualified plan or IRA, there will be tax on the distribution, but no penalty.

Many times it may make sense for the non-owning spouse to leave the account with the qualified plan (rather than rolling into an IRA) if there may be a need for the funds at some point in the future.  This will be dependent upon just how “divorce friendly” the qualified plan custodian will be. Sometimes plan administrators do not look favorably on long-held accounts by non-participants. This may require a rollover of the account, eliminating your QDRO special treatment.

Of course other 72(t) exceptions could apply, but if there was a need that did not fit the exceptions and the distributee did not wish to establish a series of substantially equal payments for five years, the QDRO would still apply to the distribution from the qualified plan (as long as the funds are still in the plan that the QDRO was written to apply to).

As an example, let’s say Lester and Edwina (both age 40) are divorcing, and as a part of the divorce settlement, Edwina’s 401(k) plan is to be shared with Lester, 50/50, with a QDRO enforcing the split.  After a couple of years Lester decides he would like to use some of the funds awarded to him from the divorce to purchase a new fishing boat.  As long as the funds are still held in the 401(k) plan, Lester can request withdrawal and receive the funds without penalty, due to the existence of the QDRO.  However, had Lester rolled over the funds into an IRA (or other qualified plan), the QDRO would no longer be in effect, and he would be unable to access the funds without paying the penalty for early withdrawal.  (It is important to note that, in either case, Lester would be required to pay ordinary income tax on the distribution.) IRC Sec 72(t)(2)(C)


  1. Jerry says:

    I need to hire a QDRO to give my now exwife 50% of my 401k. If she chooses to cash out her 50% does she have to pay taxes on it?

    1. jblankenship says:

      Yes, any distribution to cash (not rolled over to an IRA or other qualified plan) will result in ordinary income tax. With a QDRO, early withdrawal penalties (10% for withdrawing before age 59 1/2) are eliminated, however.

  2. Vic says:

    My divorce is finalized and it stipulates that my spouse in entitled to 50% of the marital 401K portion (I am the participant) up to the point of complaint and that any gains and loses be taken into consideration up to the point of QDRO distribution.

    We haven’t started the QDRO yet but I need to take advantage of the cares act and withdraw money from the account right away. From what I understand, the plan administrator would calculate the gains/loses (from time of complaint until time of distribution). Would they still be able to do so without a problem if I have withdrawn money from the account?

    Side note: My intent is not to reduce her portion of the distribution by taking a withdrawal. It’s simply a matter of circumstance. I would be withdrawing an amount I know would still be well within my portion of the overall balance. I just want to make sure the plan administrator would still be able to calculate gains/loses regardless.

    1. jblankenship says:

      It’s going to be up to your plan administrator if you can do this or if you need to split the 401(k) first. I suggest getting ahold of them and talking it through.

  3. Fran says:

    Regarding a tax-quailified defined contribution plan: Hello my name is Fran. Could you by any chance provide me with a phone number or address or email address of an IRS Advisor regarding QDRO assignments under the provision of IRC 414(p), for marital property rights. you kindly

    1. jblankenship says:

      Sorry, but all I have for you is the general IRS number (800-829-1040). You might be best off to visit a local IRS office to discuss your situation as well.

  4. Steve Agee says:

    Can a QDRO take affect as part of a separation agreement or only once the divorce is finalized? In VA you have to be separated a year (with kids) to have the divorce finalized. I have agreed to more than 50% of my 401k be given to my wife in order to allow her to pay off the house. Just want to make sure there are no hiccups waiting. Also, assuming we can do the QDRO prior to finalized divorce, does this impact whether a penalty applies for her withdrawal?

    Sorry one more question, the article seems to indicate that she should keep the funds in my 401k vs. rolling them over. Did I read that right?

    1. jblankenship says:

      You need to contact your attorney to determine the timing for the QDRO in your state.

      In order to preserve the penalty-free withdrawal option, the money must be in the 401k plan. If it’s rolled over to an IRA then it’s no longer 401k money and the QDRO doesn’t apply, so any withdrawals not fitting an exception would be subject to penalty.

  5. Diana says:

    Is there a time limit within which a plan administrator must act on a signed Court Ordered QDRO and disburse the funds to non-participant spouse in a divorce (in California)?

    1. jblankenship says:

      Not that I’m aware of. That’s a good question for a divorce attorney based in California to address.

  6. Mary Smith says:

    I have a percentage of a federal pension as alimony through a QDRO, my question is will the Social Security offset of my own Social Security be in effect? It seems the government considers me Federal when it suits them and not when it suits them, and I really don’t know which way this will go.

    1. jblankenship says:

      WEP (or GPO) is only triggered by a pension that you have earned by working for the government entity. Since the pension you will receive is not based on your own work, it will not cause a WEP (or GPO) impact to your Social Security.

      1. Mary Smith says:

        Thank you Jim, that helps so much with planning.

  7. Tammy says:

    Just for the record, the fact is in the case I am enduring is that the ex-wife of my current husband has managed to steal part of an inherited IRA that was specified to go to our children. The ex-wife has NO QDRO & has never had one yet through her attorney & Judge husband they have been able to break all kinds of laws! We have inquired all over southeast Missouri for help to no avail because of who these people are. So, the fact of the matter is it doesn’t matter what the “rules or laws” are.
    By the way, the divorce of my husband from his ex-wife took place 20 years ago in 1998; he hasn’t been able to be free from her on-going attacks on our family.
    Should someone that can help us see this post please do.

  8. Tammy says:

    What are the rules and laws in Missouri governing whether or not an inherited IRA is garnishable or not?

    1. jblankenship says:

      I don’t know for sure – you should contact a Missouri-based attorney for this information.

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