A Qualified Domestic Relations Order, or a QDRO, is often used to address marital assets that have been set aside for retirement. These assets may be in a 401(k), or they may be part of a pension plan.
When couples get divorced as they move closer to retirement age – sometimes called gray divorce – they often worry that they won’t be able to retire because they’ll lose access to the assets they expected to use to fund their retirement. A QDRO is a way to ensure that you still get at least a portion of those assets and you can still retire.
Essentially, it is a document that legally names the other spouse as an alternate payee. They have to be paid a certain percentage of the retirement plan once it begins being paid out to their ex. This court order must be followed, so it gives some security to the person who was not named in the pension plan or on the 401(k).
Two examples of how it may work
These are documents are always unique, so don’t assume that it will be paid out exactly as defined below. But these examples can help you see how it may work.
For instance, perhaps one spouse has a 401(k) that had $100,000 in it when they got married. Since that marriage, it has increased to $300,000. The QDRO may divide up the $200,000 that was earned during the marriage. This would send $100,000 to each person, while the spouse who started the plan gets to keep the $100,000 that they had at the beginning. They end up with two-thirds of the total plan, while their ex ends up with the other third.
In a second example, perhaps one spouse has a pension plan that they’ve been earning through their employment. They were earning it for 10 years before the marriage, they stayed married for 20 more years, and I have 10 years to go before they retire. The QDRO may specify that their ex gets 50% of the pension that was earned while they were married. Since half of it was earned during this time, the ex gets 25% of the entire plan – which is half of what was earned during those 20 years.
You can see how important a QDRO is to retirement and asset division. It can also become complex, so make sure you know exactly what legal steps to take.