12.4 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:

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: 401(k), 403(b), 457 plans; Defined benefit pensions; Profit-sharing plans; Most ERISA-covered plans

QDRO NOT Required: Traditional IRAs; Roth IRAs; SEP-IRAs; 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

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 59 1/2.

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:

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:

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:

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

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:

1951-1959: 73

1960 or later: 75

Hardship Withdrawals

401(k) and similar plans may allow hardship withdrawals under specific circumstances.

Qualifying Hardship Events

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

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+)

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

1. QDROs divide employer plans in divorce - no 10% penalty for alternate payee

2. IRAs don't require a QDRO - divided by divorce decree

3. Most non-spouse beneficiaries must empty inherited accounts within 10 years

4. Starting 2025, annual RMDs required if original owner died after their RMD start date

5. Eligible designated beneficiaries (spouse, minors, disabled) can use life expectancy

6. Hardship withdrawals require immediate and heavy need; penalties may still apply