What Divorcing Couples Need to Know About Qualified Domestic Relations Orders (QDROs)

Qualified domestic relations orders (QDROs) are essential to dividing retirement accounts during a divorce in Arizona. These court orders ensure that each spouse receives their rightful share of the marital retirement assets while avoiding federal tax implications and substantial penalties for early withdrawals.

A QDRO is a specialized court order that deals with division of retirement plan benefits between divorcing spouses. These include 401(k)s, IRAs, pensions and other plans and accounts that place restrictions on early withdrawals. A QDRO directs the plan or account administrator to divide the account funds between the spouses according to the terms set by the court as part of the distribution of marital assets.

Without a QDRO, a transfer of retirement funds from one spouse to another can have adverse consequences. Under normal circumstances, contributions to retirement accounts are tax-deferred, meaning they are not taxed until withdrawn after the owner reaches a certain age. However, when retirement assets are transferred directly from one spouse to another in a divorce without a QDRO, it can be treated as a taxable event. Both spouses may then owe income tax on the transferred amount, and if they are under the age of 59½, they could be subject to early withdrawal penalties as well.

Some couples may assume that because they have separate retirement accounts, there is no need to divide them. However, in Arizona, contributions to retirement accounts during the marriage, as well as gains earned, are generally considered community property and are subject to division unless otherwise stated in a prenuptial or postnuptial agreement. (Retirement assets held prior to marriage are considered the owner’s separate property.) Unless the spouses can agree to trade off other assets in exchange for keeping their own retirement accounts, a QDRO is necessary.

Crafting a QDRO requires a thorough understanding of both divorce and retirement plan rules, as well as compliance with specific IRS regulations. A poorly drafted QDRO can lead to costly errors, including tax liabilities and delays in receiving the intended benefits. A plan administrator can reject a QDRO if its terms do not adhere to the rules of the plan.

It's advisable to work with a family law attorney experienced with retirement assets to ensure that they are divided correctly and protected from penalties. An attorney can carefully consider your individual plan provisions before drafting a QDRO, so that you can achieve a streamlined division of marital assets.

Clark & Schloss Family Law, P.C. in Scottsdale, we are committed to helping Arizona residents navigate the complexities of divorce and to protecting their financial well-being. You can schedule a consultation by calling 602-789-3497 or contact us online.