Definition
A court order, issued as part of a divorce or separation, that directs a workplace retirement plan such as a 401(k) or pension to pay part of a participant's benefit to a former spouse or dependent. Plans cannot split an account without one, no matter what the divorce decree says. IRAs are divided by a simpler transfer written into the decree and do not need a QDRO.
Why it matters
A retirement account is often the largest marital asset, and dividing it wrong creates a tax bill. Money moved under a QDRO into the former spouse's own IRA is not taxed, and cash the former spouse takes directly from the plan under the order is taxable but exempt from the 10% early-withdrawal penalty, an exception that disappears once the money is rolled to an IRA.
Example
A participant's 401(k) holds $400,000, of which $300,000 accumulated during the marriage. The QDRO awards the former spouse half of the marital portion, $150,000, which the plan transfers to the former spouse's IRA with no tax due. Had the former spouse instead taken $20,000 in cash directly from the plan under the order at age 45, income tax would be owed on it but the $2,000 penalty would not.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.