In the world of family law, the acronym QDRO stands for Qualified Domestic Relations Order. QDROs often play a very important role in a divorce and family law firm or legal separation, as even couples of relatively modest means often will have thousands or tens of thousands of dollars invested in a 401(k) or other employer-sponsored retirement plan.
Like other property, 401(k)s and the like are subject to equitable division between the two spouses, so long as the retirement plan indeed qualifies as marital property under Colorado law. On a practical level, this will often mean that the account itself will need to be split in some fashion between a couple who are divorcing or legally separating.
After all, it is not always possible for a couple to agree on an equitable distribution otherwise. A QDRO is a separate court order, distinct from the divorce decree itself, which a judge will sign and issue to the manager of the retirement plan directing the manager to divide the plan.
Because retirement plans are subject to special tax incentives, penalties apply for early withdrawals out of retirement plans except under limited circumstances, even when the person withdrawing the funds is doing so pursuant to a court order. A QDRO is one of those limited circumstances where penalty-free withdrawals are allowed. Just the same, it is imperative that the QDRO be completed properly if a couple wishes to avoid tax penalties.
If the manager of the retirement plan finds the judge’s order acceptable from a tax standpoint, then the manager will arrange for the plan to be divvied up according to the terms of the QDRO. In this respect, there are many different permissible ways to separate and divide a retirement plan. QDROs are important legal documents that must be negotiated and drafted with the utmost care.