Qualified Domestic Relations Order (QDRO)
What it is:
A qualified domestic relations order (QDRO) is a legal document used to split a person's retirement plan, usually as part of a divorce decree.
How it works (Example):
For example, let's assume that Jane and John are getting divorced. John has a 401(k) with $500,000 in it. The presiding judge decides that they will split the 401(k) 50/50. In order to officially do so, the judge will sign a QDRO (pronounced "quadro") directing the account's custodian to put 50% of the 401(k) in a separate account under Jane's name.
A QDRO must specifically describe the percentage of benefits to be allocated to the ex-spouse. It may not award amounts or benefits that are not available under the spouse's retirement plan.
Why it Matters:
QDROs help people allocate tax responsibilities after divorce. In our example, Jane becomes responsible for any taxes incurred when she begins taking distributions of the 401(k) money. Without the QDRO, John would have been legally responsible for the taxes on the distributions, even if he gives or is ordered to give Jane the proceeds.