QDRO -  What It Is, Why Important?

Summary:  Through the use of a QDRO, federal ERISA and tax laws allows you to divide retirement plans in a divorce without having to pay income tax or the 10% early withdrawal penalty. A QDRO can be used to divide marital property. It can also be used to collect child support and maintenance (alimony.)

What is a QDRO and Why It Is So Important?

Retirement plans are often a couples' largest asset.  They are used in the marital division of property in a divorce.  Also, child support and maintenance (alimony) payments can be made from them.

Whenever a plan participant withdraws money from a retirement plan, the participant is taxed on the withdrawal. Both federal and state income taxes must be paid. An additional 10% early withdrawal penalty may also be taxed. This includes transfers to a spouse or former spouse.  The tax is paid by the plan participant (employee.)

A Qualified Domestic Relations Order (QDRO) is a state court order which is used to divide retirement plan assets without the payment of any income tax at the time of the division.

It is used to divide martial assets in a divorce. It can also be used to collect child support and maintenance (alimony) when there is an unpaid arrears.  So that the plan participant (employee) does not have to pay income tax or penalties.

It should be used to divide retirement assets, somewhat similar to the division of house equity and other assets acquired during a marriage. It should be used so that the former spouses go their own separate ways, without any financial ties.

What About Government Plans, Such as Colorado PERA?

A QDRO is not used to divide government plans, such as federal government, state, or city retirement plans. Such as the Colorado state PERA retirement plans.

Instead, government plans are divided through the use of a somewhat different court order, such as a DRO or COAP. However, the effect of using a different type of court order to divide a government plan is generally similar to the use of a QDRO. The result is about the same, in most cases.