An overview of the different types of retirement plans that can be divided by a QDRO

Discover the intricacies of qualified domestic relations orders (QDROs) and their application in dividing various types of retirement plans. Our comprehensive overview delves into the division of 401(k), 403(b), 457, and pension plans. Explore the distribution options available for each plan type, as well as the rules and terms governing QDROs. Enhance your understanding of these important aspects to navigate the complexities of retirement asset division effectively.

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A QDRO (Qualified Domestic Relations Order) is a legal document that allows a spouse, former spouse, child or other dependent of a retirement plan participant to receive a portion of the plan benefits in the case of a divorce or other domestic relations issue.

A QDRO can apply to different types of retirement plans, such as 401(k) plans, 403(b) plans, 457 plans, and pension plans, whereas similar court orders (often called DROs) can be used on government plans and IRA accounts. However, the rules and options for dividing these plans may vary depending on the plan type and the terms of the QDRO. Here is an overview of some common types of retirement plans that can be divided by a QDRO and their distribution options.

401(k) Plans: A 401(k) plan is a type of qualified plan that allows employees to contribute a percentage of their pre-tax income to a retirement account. The employer may also match some or all of the employee’s contributions. A QDRO can assign a percentage or a dollar amount of the participant’s 401(k) account balance to an alternate payee, such as a former spouse. The distribution options for 401(k) plans depend on the plan’s rules and the QDRO’s terms. Generally, the alternate payee can either take a lump-sum distribution, which may be subject to income tax, or roll over the distribution to an IRA or another qualified plan, which can defer taxes until withdrawal. The alternate payee may also be able to leave the funds in a separate account with the same 401(k) plan as the participant, though some plans do not allow this. Note that a 10% early withdrawal penalty typically does not apply to withdrawals made pursuant to a QDRO. 

– 403(b) and 457 Plans: These are tax-deferred retirement plans for employees of public schools, nonprofit organizations, and certain ministers. They allow employees to contribute a portion of their salary to an annuity contract, a custodial account, or a retirement income account. The employer may also make matching or non-elective contributions to the plan. Distribution options for 403(b) and 457 plans include lump-sum payments, periodic payments, annuities, rollovers, and hardship withdrawals. A QDRO or DRO can assign a percentage or a dollar amount of the participant’s account balance or benefit payments to an alternate payee. The alternate payee can choose to receive the distribution immediately or defer it until the participant’s earliest retirement age. The alternate payee is responsible for any taxes on the distribution and can roll it over to another eligible retirement plan or IRA.

Employer Matching Contributions and QDROs: Some 401(k) or 403(b) plans include employer matching contributions, which are additional funds that the employer contributes to the employee’s account based on their own contributions. For example, an employer may match 50% of the employee’s contributions up to 6% of their salary. In some cases, these matching contributions may be subject to vesting requirements, which means that the employee must work for a certain period of time before they can claim full ownership of them. If a QDRO assigns part of the participant’s 401(k) account to an alternate payee, it may also include the employer matching contributions, depending on whether they are vested or not. If they are vested, they are treated as part of the account balance and can be divided by the QDRO. If they are not vested, they may not be available for division until they become vested.

Pension Plans: These are defined benefit plans that promise to pay a fixed amount of monthly income to retirees based on their years of service, salary, and age. The employer is responsible for funding the plan and managing the investments. Distribution options for pension plans include single life annuities, joint and survivor annuities, lump-sum payments, and rollovers. A QDRO can assign a portion of the participant’s monthly benefit or lump-sum payment to an alternate payee. The alternate payee can receive the benefit as soon as the participant becomes eligible for retirement or the participant’s actual retirement date. The alternate payee is responsible for any taxes on the benefit and can roll it over to another eligible retirement plan or IRA if it is paid as a lump sum.

IRA Accounts: An IRA (Individual Retirement Account) is a type of retirement account that allows individuals to save for retirement with tax advantages. There are different types of IRAs, such as traditional IRAs, Roth IRAs and SEP IRAs. Unlike qualified plans, IRAs are not subject to ERISA and do not require a QDRO to divide them in a divorce (though a DRO can be prepared to “force” the transfer of assets from a reluctant spouse-participant). Instead, an IRA can be divided by a process called “transfer incident to divorce”, which is a direct transfer of IRA assets from one spouse’s account to another spouse’s account pursuant to a divorce decree or separation agreement. The transfer incident to divorce is not taxable or subject to penalties as long as it is done within one year of the divorce becoming final. The distribution options for IRA accounts depend on the type of IRA and the age of the owner. Generally, withdrawals from traditional IRAs are taxable as ordinary income and subject to a 10% early withdrawal penalty if they are made before age 59 1/2. Withdrawals from Roth IRAs are tax-free and penalty-free if they are made after five years from the first contribution and after age 59 1/2. SEP IRAs follow similar rules as traditional IRAs.

A QDRO is an important tool for ensuring that retirement plan assets are fairly divided in a divorce or legal separation. Rather than use a model order from your retirement plan, or pay thousands of dollars for an attorney to prepare your order, try our tested, versatile orders first – we offer a money-back guarantee and allow you to preview your documents before you pay

Willie Peacock
Author: Willie Peacock

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