QDROs: How They Work, the Risks, and Whether One Could Be Right for You

We introduced a surprising idea: you don’t need to be divorcing to use a QDRO (Qualified Domestic Relations Order). Couples can actually use them while married — an approach known as QDRO— to delay taxes, protect assets, and add flexibility to retirement planning.

We’ll go step by step into the mechanics, legality, risks, and practical realities so you can understand whether this strategy might make sense for you.

Quick Refresher:

What Is a QDRO? At its core, a QDRO is a court order telling a retirement plan (like a 401(k) or pension) to treat part of the account as belonging to the other spouse. Traditionally, this happened in divorce. With a QDRO, a couple isn’t splitting up. Instead, they make an interspousal agreement under state law, get it approved by a judge, and use that order to move money between themselves. The federal QDRO rules make the transfer possible without taxes or penalties.

Additional Ways Couples Use QDROs, we previously looked at three big uses: delaying RMDs, planning for Medicaid, and creating guaranteed income. But those aren’t the only tricks in the toolbox.

1. Funding Roth IRAs for High Earners: Normally, couples who make over a certain income can’t contribute directly to Roth IRAs. But an In-Marriage QDRO can shift funds from a 401(k) into the younger spouse’s IRA, which can then be converted to a Roth. That bypasses the income limits and builds tax-free retirement money.

2. Avoiding the Early Withdrawal Penalty: If you’re under 59½ and take money out of a retirement account, the IRS usually hits you with a 10% penalty. But through an In-Marriage QDRO, money can be transferred to the other spouse, who can withdraw without that penalty. For families who need emergency cash, this can be a lifesaver.

3. Shifting Money Between Tax Brackets: Spouses don’t always earn equally. Sometimes one is in a high tax bracket while the other’s income is lower. By transferring part of the retirement account to the lower-income spouse, withdrawals can be taxed at a gentler rate.

   
   

Is It Really Legal?

This is the million-dollar question. When people first hear about In-Marriage QDROs, they often say: this sounds too good to be true — won’t the IRS shut it down?

Here’s why it’s legal:

• Federal law explicitly says “spouse.”

• The IRS allows it.

• The Department of Labor confirmed it.

• Federal courts back it up.

So long as the QDRO is drafted properly, approved by a state judge, and qualified by the retirement plan, it’s as legitimate as any divorce-related QDRO.

The Process:

This isn’t something you can do in a weekend.

1. Hire an attorney (and financial planner).

2. The attorney will draft an interspousal agreement.

3. The attorney will draft the QDRO for the plan administrator.

4. The attorney will draft the required family law paperwork.

5. File all the paperwork in state court.

6. Submit to the plan administrator once signed by the judge.

7. Funds move once approved.

   
   

Timeline: On average, 75–100+ days.

Costs: court fees, plan administrator fees, and attorney fees.

The Risks You Need to Know:

A QDRO is powerful, but it’s not risk-free.

1. Divorce Risk. Once money is transferred, it truly belongs to the other spouse.

2. Death Risk. If the spouse who receives the funds dies, they control what happens next.

3. Property Reclassification. In some states, transfers change whether funds are marital or separate property.

4. Time and Cost. It takes months and costs thousands of dollars.

5. Complexity. Many attorneys (or advisors) understand this strategy.

   
   

How to Minimize the Risks

• Work with experienced professionals like those at Ovando Bowen LLP.

• Put estate planning in place.

• Understand your state law.

• Be clear-eyed about divorce.

• Get everything in writing.

When an In-Marriage QDRO Might Not Be a Fit

• If your retirement accounts are already rolled into IRAs.

• If you live in a state with restrictive spousal-contract laws.

• If the potential savings are small compared to the costs.

• If your marriage is unstable.

The Bottom Line:

A QDRO isn’t magic, but it is a powerful and little-known tool. By using the same legal structure created for divorce, couples can delay or reduce taxes, protect assets, and create flexibility in retirement planning. But it’s not a do-it-yourself trick. It requires legal paperwork, court approval, plan administrator sign-off, and a willingness to accept risks.

For couples who fit the right profile, it can mean tens of thousands of dollars in benefits. For others, it may not be worth the complexity. The key is knowing the option exists.

Key Takeaways

• QDROs while married are legal.

• The process takes time and money.

• Risks include divorce, death, and property reclassification.

• State laws differ.

• Not for everyone, but for the right couple, it can unlock major tax savings and financial flexibility.

If you live in California, the attorneys at Ovando Bowen LLP have experience with this financial and retirement planning strategy and ready to help you implement this exciting strategy.