How divorce affects your retirement accounts: What a QDRO is and why it matters

What is a QDRO, and how does it work?

A QDRO is a court order that tells a retirement plan administrator how to divide benefits between spouses or former spouses.¹

Your divorce decree may specify who gets what. However, any plan covered by the Employee Retirement Income Security Act (ERISA) generally needs a QDRO before it will pay benefits to a former spouse. The order can be part of a divorce decree or a separate document.²

The QDRO identifies the retirement plan, account holder, person receiving benefits (called the alternate payee), and how much they’ll receive.³ Once the plan administrator reviews and signs in, the court will issue the order.

Which retirement accounts need a QDRO?

Most private-sector employer-sponsored retirement plans require a QDRO to divide retirement benefits in a divorce. Other accounts follow different rules.²

• Accounts that generally require a QDRO include 401(k)s, private-sector pensions, and 403(b)s covered by ERISA.
• Accounts that don’t require a QDRO, including traditional, Roth, SEP, and SIMPLE IRAs, generally use a transfer incident to divorce instead.⁴ This paperwork moves awarded funds directly between accounts under a divorce or separation agreement. 
• Accounts with their own rules may include federal, state, and local government pensions, military retirement plans, and certain church-sponsored plans.

Can your ex-spouse get half your retirement savings?

How much your ex-spouse receives from your retirement accounts depends largely on where you live and how your marital assets are divided.

States generally follow one of two approaches for dividing assets:

• Equitable distribution states: Most states divide marital property based on what’s fair, which could mean a 50/50 split, a 60/40 split, or any other ratio.⁵
• Community property states: A handful of states treat assets accumulated during marriage as equally owned by both people. This equal ownership includes retirement savings.⁵

Even in community property states, you don’t necessarily split every single asset directly down the middle. For example, say you and your spouse have $300,000 in home equity and $300,000 in retirement savings. If all are considered marital property, you might agree that one spouse keeps the house while the other keeps the retirement accounts, rather than splitting both assets.

What are the tax consequences of dividing retirement accounts in divorce?

You can usually avoid immediate taxes by rolling money awarded through a QDRO into an IRA. If you take the money as cash instead, you’ll typically owe income taxes.⁶

For example, say you’re awarded $100,000 from your former spouse’s 401(k). You could transfer it to an IRA and avoid a tax hit. But if you took a $100,000 cash distribution, you could owe $24,000 in federal income taxes alone, assuming the full amount is taxed at 24%.

For an IRA, similar rules apply. You generally won’t pay taxes if you make a transfer under a divorce or separation agreement (this is different from a QDRO). But if you withdraw the money, you could owe income taxes and a 10% early withdrawal penalty if you're under age 59½.⁶

How can you protect your retirement savings during divorce?

If dividing an employer-sponsored retirement plan in your divorce decree, follow these steps to minimize hiccups.

1. Find out what each plan requires. If you need a QDRO, ask your plan administrator to provide you with the rules and any sample language you could use before finalizing your settlement.
2. Get help with the paperwork. QDROs require specific drafting expertise, so consider consulting a QDRO specialist attorney in addition to your divorce attorney.
3. Don’t put it off. Ideally, you’ll get the QDRO approved as part of the divorce process. Waiting too long could result in lost benefits, especially if the participant retires, changes jobs, or dies.
4. Make sure everything goes through. Once you submit your QDRO, follow up with the plan administrator to confirm it’s been accepted and confirm your remaining benefits.

How do you rebuild your financial plan after divorce?

Going through divorce can completely reset your finances. Here are five steps you can take to rebuild afterward.

1. Make a new budget. Add up your monthly income and expenses, including any child support or alimony payments. If your emergency savings dwindled during the divorce, make a plan to rebuild them.
2. Revisit your retirement goals. Look at how much you have saved, how much you can contribute going forward, and whether your retirement timeline still makes sense. New York Life has retirement planning resources to help you get started.
3. Review your life insurance. If you have children or anyone else depending on your income, make sure you have enough insurance coverage after divorce.
4. Think about protecting your income. If you’re now a one-paycheck household, consider what would happen if you lost your income due to illness or injury. Disability insurance could help cover expenses if you become unable to earn an income.
5. Update your estate plan. Review your will, powers of attorney, and beneficiary designations. Make sure any changes follow the terms of your divorce settlement.

How can a financial professional help during and after divorce?

A financial professional can help you understand how the decisions you make during divorce could affect your finances for years down the road. They can also work alongside your divorce attorney, QDRO attorney, and tax professional to help you understand your options before you agree to a settlement. And once the divorce is finalized, they can help you figure out where to go from here.

Frequently asked questions about QDROs and divorce