When you and your spouse divorce, the court tries to divide your marital property as equitably as possible. This division typically includes any retirement accounts held by either spouse. However, because retirement accounts are subject to strict distribution guidelines, the court must follow a specific procedure when dividing their contents.
In most cases, state divorce laws will determine how the court divides the contents of your retirement accounts. For example, in states with community property law, the court divides the value of all retirement account funds accumulated during the marriage evenly between the divorcing spouses. In states without community property law, the spouse who owns the account may keep all of its contents, or the court may distribute a portion of the account to each spouse, depending on the circumstances.
If the court elects to distribute a portion of the value of one spouse's retirement account to the other spouse, it will typically use a qualified domestic relations order. With a QDRO, the IRS will allow the distribution to proceed without incurring a penalty. Without the QDRO, the IRS may impose a 10 percent early withdrawal penalty on the amount of the distribution. Furthermore, the owner of the account may owe income tax on the amount his former spouse received.
The court may issue a QDRO as part of the divorce settlement, or it may issue it as a separate order. QDROs must include each party's name and mailing address, the name of the affected plans and the percentage or dollar amount to be distributed. Upon receipt of a QDRO, the plan administrator must follow the order's instructions, as long as the instructions don't contradict the provisions of the retirement plan. If the plan administrator discovers a contradiction, he must return the QDRO to the court for amendment.
As of December 2012, community property states include Texas, California, Wisconsin, Nevada, Louisiana, Arizona, Idaho, New Mexico and Washington. In community property states, the law doesn't require the court to physically split each asset in half. Instead, the court must ensure that the assets each spouse receives must be equal in value. For this reason, some courts may elect to avoid the need for a QDRO by awarding one spouse another asset, such as the family home, in place of her half of the retirement account.