QDRO: Important wealth paperwork in divorce

There are many elements to a divorce beyond the end of marriage.

Divorce can affect your retirement savings, child custody and property. Each area requires its own consideration and paperwork as the divorce is finalized. Further, these documents are relevant to spelling out the larger agreement between you and your ex.

Getting this paperwork right can help avoid both financial and emotional turmoil later in life. Many of the disputes you could face with your ex as life changes can be settled by renegotiating an agreement. However, some government agencies dictate the paperwork required in the process, and divorcees who do not take this into consideration could find themselves facing additional scrutiny at tax time.

QDRO: What is it and what does it mean for divorce?

Among the many assets that will be split in a divorce, your retirement account is among the largest assets in your family and will be a primary concern of marital property division. In some cases, it can also be used to pay the costs of child support or alimony. How does the process of dividing a pension work? Most are commonly divided using a Qualified Domestic Relations Order.

QDROs can be used to distribute most private-industry pension plans (people not employed by the local, state or federal government) covered by ERISA. The good news for recipients when using a QDRO is that the benefits can be received tax-free under certain circumstances.

A QDRO can be paid to a former spouse, child or dependent as part of a divorce decree. However, obtaining such an order requires a judge's review. Further, a spouse doesn't necessarily have to agree to the order for it to be legal and payable.

Who manages QDRO?

You shouldn't hesitate to ask your attorney about a QDRO during divorce because it can be useful in dividing complex estates. After a QDRO is put in place, the pension holder's employer may administer payments because they initially offered the plan, according to Department of Labor guidelines.

Because a QDRO is managed by a third-party, it can be more efficient than simply trusting an ex to arrange for payment themselves. In addition to dictating who can receive QDRO payments, the time and amount are also subject to guidance from the IRS and DOL, and an attorney can explain what rules apply to your situation.

You are right to be worried about long-term assets during a divorce. Using a QDRO can be one way to secure these accounts for the future.