Dividing The Money in a Divorce

Don’t let the alphabet soup in the title put you off. If you’ve never come face-to-face with a QDRO you might not need to know this – but then again, the basic underlying premises are good information to understand…

First some definitions, just so we know what we’re talking about:

QDRO: Qualified Domestic Relations Order – this is a method for permitting distributions from a qualified retirement plan (not an IRA) in the event of a divorce.  What happens is that, upon the decreed division of assets, if the retirement plan (such as a 401(k) or 403(b)) of one spouse is chosen as an asset to be divided and a portion given to the other spouse, a QDRO is issued.  This QDRO allows the division to occur without penalty… otherwise, making a distribution from a qualified plan before age 59½ would result in penalty and possible taxation, as we all know.  The QDRO provides a way for the receiving spouse to rollover the funds into an IRA of her own, without tax or penalty to either spouse.

NUA: Net Unrealized Appreciation – this is a special provision from qualified retirement plans that allows the employee to elect to treat company stock differently from all other assets in the plan when making a distribution from the plan.  Essentially, you can pay ordinary income tax on the basis of the stock in your employer’s (actually former employer’s) company, and then place the stock in a taxable brokerage account, making any gains on the stock subject only to capital gains tax (rather than ordinary income tax, which could be much greater).  The trick is that you can only do this maneuver one time, and the distribution must be in a lump sum of all your 401(k) account holdings.  Everything in the account that is not company stock can be rolled over into an IRA and maintain tax deferral as usual.  It’s critical to note that this can be the only distribution of funds from the account – if you were to roll over a small amount of funds in a previous year, you can no longer take advantage of the NUA provision.


So the question comes up – if a QDRO distribution occurs for your account, and that distribution includes company stock: does this “bust” the employee’s ability to later have the company stock treated with the NUA privilege, since the rule states that the distribution must be a one-time single lumps-sum distribution? 

(drum roll…) The answer is NO.  A QDRO is a division of the account, and though technically a distribution has occurred, this distribution does not impact the remaining account’s ability to take advantage of the NUA provision.  The employee can go ahead and, upon separation from service, perform the lump-sum distribution of the stock and rollover the remainder into an IRA and get the NUA treatment for the stock.

Now, if you’re really astute, the last paragraph made you think of another question (it’s okay to admit it if you aren’t tax-geeky enough to have thought of this question): Can the ex-spouse (the one receiving a split of the employee’s plan) elect NUA treatment of any stock that was included in his portion of the account?

(drum roll…) The answer is a qualified YES.  The qualification is this: As long as the rest of the account is eligible to be distributed (to include NUA treatment), the QDRO’d portion of the account can also take advantage of this provision.

In other words, although the ex-spouse of the employee could roll over the QDRO’d qualified retirement plan into an IRA at any time, if the account contains appreciated employer stock (stock of the former spouse’s employer) – it may be in the best interest of the receiving spouse to wait until the employee reaches age 59½ or leaves employment (termination or retirement), so that she can take advantage of the NUA provision.  Otherwise, any rollover will squash this option forever.


Here’s a quick example to illustrate:  Dick and Jane are divorcing.  Dick has a 401(k) plan with his employer, including some stock in his employer.  Part of the divorce includes a QDRO to give Jane half of the 401(k) plan.

Once the QDRO is completed, Dick still has his original 401(k) account (albeit diminished by half), and Jane has an account in the plan of equal size.  Jane can rollover those funds into an IRA at any time, if she chooses, without penalty.  However, since the account holds highly appreciated company stock, in order to qualify for NUA treatment, she must maintain the account in the 401(k) plan until Dick terminates employment, retires, or reaches age 59½.  At that time, she can pull the lump-sum distribution for NUA treatment and rollover the rest into an IRA.  Dick can elect NUA treatment for his account when he terminates employment or retires.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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  • Mary,

    You should be able to rollover into an IRA the amount of your husband’s retirement plan that is determined for you. Whether you can roll this into a 401(k) plan is determined by the 401(k) administrator.

    In either case, this rollover does not impact your annual contributions to the account into which the rollover occurs. If the money is rolled over into one of these plans (IRA, 401(k), etc.), there will be no tax at that time.

    Hope this helps –


  • My husband’s pension is due to be split due to our divorce. Am I still able to roll my portion into a 401K even though I have not been employed, or must I take the distribution as cash? If an IRA is possible, will I be limited to the regular yearly contribution of $5000 and have to pay taxes on the rest? Will I be liable for the 10% penalty? Thank you for any information you can provide.

  • Hi Jim

    I will have to divide a joint brokerage account due to divorce in the coming months. It is over a million dollars worth of 1 stock and I was wondering if I can create two new accounts, close the joint account, and transfer/distribute ownership of half the stock to each of our individual accounts without having to sell it and pay capital gains. The account is with TD Ameritrade, if that matters.

    Thank you in advance,


  • Hi, Cathy –

    You’ll want to contact the plan administrator to see if there are any restrictions on withdrawals.

    Generally speaking, since this account was subject to a QDRO your withdrawals from it should be free from penalty.


  • Hi Jim,
    I received a portion of my ex-husband’s pension and profit sharing plan during our divorce in 1995, pursuant to a QDRO. In 1999, I took out a small loan from the plan, but later defaulted on the loan. I believe that it was then considered to be a distribution. I now want to take another distribution from the account, and since I am not yet 59 1/2, I want to know if it will be considered a penalty-free distribution, or if only the first distribution would be considered penalty-free. I realize that I will need to pay taxes on it, but want to avoid the ten percent penalty. Thanks!

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