QDROs & Special Situations
Special circumstances in retirement planning require understanding specific rules for divorce, inheritance, and hardship situations. These situations often appear on the Series 65 exam.
Qualified Domestic Relations Orders (QDROs)
A Qualified Domestic Relations Order (QDRO) is a court order that recognizes an alternate payee's right to receive all or part of a participant's retirement plan benefits, typically as part of a divorce.
QDRO Requirements
For a domestic relations order to be "qualified," it must:
| Requirement | Details |
|---|---|
| Court Order | Issued by state domestic relations court |
| Alternate Payee Identified | Spouse, former spouse, child, or dependent |
| Plan Identified | Names the specific retirement plan |
| Amount Specified | States dollar amount or percentage |
| Method Specified | How and when payments will be made |
Which Plans Require a QDRO?
| QDRO Required | QDRO NOT Required |
|---|---|
| 401(k), 403(b), 457 plans | Traditional IRAs |
| Defined benefit pensions | Roth IRAs |
| Profit-sharing plans | SEP-IRAs |
| Most ERISA-covered plans | SIMPLE IRAs |
On the Exam: A QDRO is required for employer-sponsored qualified plans. IRAs can be divided through a "transfer incident to divorce" under the divorce decree—no QDRO needed.
Tax Treatment of QDRO Distributions
| Situation | Tax Treatment |
|---|---|
| Rollover to IRA | Tax-deferred (no current tax) |
| Direct Payment to Alternate Payee | Taxable as ordinary income |
| 10% Early Withdrawal Penalty | Does NOT apply to QDRO distributions |
Key Benefit: Unlike most early distributions, QDRO payments to an alternate payee are exempt from the 10% early withdrawal penalty, even if the recipient is under age 59½.
What a QDRO Cannot Do
- Require the plan to pay more than it otherwise would
- Provide a form of benefit not offered by the plan
- Require benefits already assigned to another alternate payee
- Direct payment of benefits to someone other than a spouse, former spouse, child, or dependent
Inherited Retirement Accounts
The rules for inherited retirement accounts changed significantly with the SECURE Act (2019) and SECURE 2.0 (2022).
Spousal Beneficiary Options
Surviving spouses have the most flexibility:
| Option | Description |
|---|---|
| Treat as Own | Roll into own IRA, use own RMD schedule |
| Remain as Beneficiary | Follow beneficiary distribution rules |
| Disclaim | Pass to contingent beneficiary |
Non-Spouse Beneficiaries: The 10-Year Rule (2025+)
For deaths after December 31, 2019, most non-spouse beneficiaries must empty the inherited account within 10 years:
| Original Owner Status | Beneficiary RMD Requirement |
|---|---|
| Died BEFORE RMD Start Date | No annual RMDs required; empty by year 10 |
| Died AFTER RMD Start Date | Annual RMDs required in years 1-9; empty by year 10 |
Important 2025 Change: The IRS waived annual RMD requirements for non-spouse beneficiaries from 2021-2024. Starting in 2025, if the original owner died after their RMD start date, annual distributions are required.
Eligible Designated Beneficiaries (EDBs)
These beneficiaries can use the old "stretch" rules based on life expectancy instead of the 10-year rule:
| EDB Category | Notes |
|---|---|
| Surviving Spouse | Can treat as own or use life expectancy |
| Minor Child of Deceased | Stretch until age 21, then 10-year clock starts |
| Disabled Individual | IRS definition of disability |
| Chronically Ill Individual | IRS definition of chronically ill |
| Not More Than 10 Years Younger | Than the deceased account owner |
Inherited Roth IRAs
| Feature | Rule |
|---|---|
| Original Owner's Lifetime | No RMDs required |
| Beneficiary Rules | Same 10-year rule applies |
| Tax Treatment | Qualified distributions remain tax-free |
| Advantage | Tax-free growth during 10-year period |
Death and Required Distributions
Year-of-Death RMD
If the account owner dies during a year when an RMD was required but not yet taken:
- The beneficiary must take the remaining RMD
- Must be taken by December 31 of year of death
- Cannot be rolled over (it's the deceased's RMD)
RMD Start Date (2025)
Under SECURE 2.0, the RMD start age is:
| Birth Year | RMD Start Age |
|---|---|
| 1951-1959 | 73 |
| 1960 or later | 75 |
Hardship Withdrawals
401(k) and similar plans may allow hardship withdrawals under specific circumstances.
Qualifying Hardship Events
| Category | Examples |
|---|---|
| Medical Expenses | Uninsured medical costs for employee, spouse, or dependents |
| Home Purchase | Down payment for primary residence |
| Education | Tuition for next 12 months |
| Eviction/Foreclosure Prevention | Payments to avoid loss of principal residence |
| Funeral Expenses | For employee or immediate family |
| Casualty Losses | Disaster-related losses |
| SECURE 2.0 Additions | Domestic abuse, terminal illness, emergency expenses |
Hardship Withdrawal Requirements
| Rule | Details |
|---|---|
| Immediate and Heavy Need | Must be pressing and genuine |
| Limited to Need | Cannot withdraw more than required |
| Tax Treatment | Ordinary income tax applies |
| 10% Penalty | Generally applies unless exception met |
SECURE 2.0 Penalty-Free Exceptions (New for 2024+)
| Exception | Maximum Amount |
|---|---|
| Emergency Expenses | $1,000/year, no penalty if repaid within 3 years |
| Domestic Abuse Victim | Lesser of $10,000 or 50% of account |
| Terminal Illness | Any amount, no penalty |
| Disaster-Related | Up to $22,000 for federally declared disasters |
Key Takeaways
- QDROs divide employer plans in divorce—no 10% penalty for alternate payee
- IRAs don't require a QDRO—divided by divorce decree
- Most non-spouse beneficiaries must empty inherited accounts within 10 years
- Starting 2025, annual RMDs required if original owner died after their RMD start date
- Eligible designated beneficiaries (spouse, minors, disabled) can use life expectancy
- Hardship withdrawals require immediate and heavy need; penalties may still apply
A QDRO distribution to a former spouse from a 401(k) plan:
Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA after 2019 must:
Which of the following is NOT required to use a QDRO for division in divorce?