A Qualified Domestic Relations Order is a specialized court order created and enforced in divorces, where retirement assets such as 403(b) and other annuity assets are involved. Without the QDRO, tax implications exist for both parties. Not going through proper QDRO protocol is no excuse in family court, and judges may react unfavorably to the party who acts in haste.
Annuities are given tax-deferred benefits by the Internal Revenue Service. The QDRO allows you to split the annuity and keep the tax deferral. You don't pay either taxes or penalties in the split, and your ex maintains the advantage of continuing tax-deferred growth. Without a QDRO, the owner of the annuity must take a distribution and pay the appropriate taxes and penalties. The recipient can take the distributed assets, but won't be able to roll them into a qualified plan such as an employer's 401(k) or 403(b) plan. The funds lose any qualified status they had while held under a qualified annuity. Non-qualified annuities don't have the same ramification to the recipient, but the party making the distribution is still responsible for taxes.
QDRO and Divorce
The QDRO is part of the overall financial negotiation process two parties go through in a divorce. All assets and debts are listed, as well as income resources. The parties or the courts decide how assets are split between the two. Since qualified and non-qualified assets are considered part of the marital estate and valuable to both parties in preparing for retirement, they are split as well.
Determining the QDRO
When the courts determine the financial split, the amount of the retirement annuity is included either as a dollar value or as a percentage. The owner of the annuity will need to roll that value into a new annuity opened by the ex-spouse receiving the portion of the asset. Before the funds are transferred, the ex-spouse must open a rollover or transfer QDRO annuity. All information from both accounts is incorporated into the QDRO, stating how much is coming from annuity A and going into annuity B. Account numbers and contact information are also included. The QDRO becomes a court order; both annuity companies get a copy of the QDRO with all pertinent transfer papers.
Family court judges look at actions as possible ways of retaliation to an ex-spouse. If you own an annuity and want a quick divorce, it might seem simple enough to take a distribution from your annuity and give it to your ex. The distribution might be the required amount; it might even be more. If the annuity is a qualified plan, all distributions are added to your income. If you aren't yet 59 1/2 years old, there is an additional 10 percent penalty. Judges might not allow you to split the tax bill with your ex, and may order further distribution of qualified funds in a QDRO to allow for retirement growth. Other issues the judge might need to rule on could become tainted by this costly mistake.