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Going through a divorce is tough enough without accidentally handing a chunk of your retirement savings to the IRS. Yet that's exactly what happens to countless Florida residents every year when they don't understand how Qualified Domestic Relations Orders (QDROs) interact with current tax rates.

If you're a Florida state employee with an FRS pension, or anyone with a 401(k) facing the prospect of dividing retirement assets, the decisions you make in the next few months could cost, or save, you thousands of dollars in taxes.

Let's break down exactly how to navigate this process without falling into the most common QDRO traps.

What Is a QDRO and Why Should You Care?

A QDRO is a legal order that allows retirement plan benefits to be divided between spouses (or former spouses) during a divorce. Think of it as the official permission slip that tells your retirement plan administrator: "Hey, it's okay to split these funds according to the divorce decree."

Here's what most people don't realize: the QDRO itself doesn't determine whether you pay taxes: it determines who pays them.

According to IRS rules, the alternate payee (that's the person receiving a portion of the retirement funds) is responsible for paying income taxes on any distributions they receive. A 1996 Tax Court case made this crystal clear: even if your divorce agreement tries to shift tax liability back to the original plan participant, the IRS doesn't care. The recipient pays.

This is where proper planning becomes essential, and where many Florida residents working with professional wealth advisors find significant value.

Legal document being split to illustrate how QDROs affect retirement savings division and FRS pensions in Florida

The 2026 Tax Landscape: What's Changed

Here's where things get interesting: and potentially expensive: for anyone processing a QDRO this year.

The Tax Cuts and Jobs Act provisions are set to sunset at the end of 2025, which means 2026 brings higher marginal tax rates for most income brackets. If you're receiving a lump-sum distribution from a divided retirement account, you could be looking at a substantially higher tax bill than you would have faced just a year ago.

For high-income earners in Martin County and Palm Beach County, this shift is particularly significant. The top marginal rates have reverted to pre-2018 levels, and that impacts every dollar you pull out of retirement accounts.

The good news? There are legitimate strategies to defer these taxes: if you act strategically.

FRS Pensions vs. 401(k)s: Different Rules, Different Strategies

Florida Retirement System pensions and private-sector 401(k)s aren't created equal when it comes to QDROs. Understanding the differences is crucial for tax planning.

FRS Pension Considerations

The FRS operates differently than a typical 401(k). When dividing an FRS pension through a QDRO, you're typically dealing with a defined benefit plan: meaning the benefit is based on years of service and salary, not a specific account balance.

Key points for FRS participants:

  • The division is usually calculated as a percentage of the monthly benefit
  • The alternate payee typically can't take a lump-sum distribution
  • Payments generally begin when the plan participant retires

This structure actually provides some built-in tax protection, since benefits are distributed monthly rather than in one taxable lump sum.

401(k) and Similar Plans

With defined contribution plans like 401(k)s, you have more flexibility: and more potential pitfalls. The alternate payee can often choose to:

  • Leave funds in the plan
  • Roll over to an IRA
  • Take a lump-sum distribution

That third option is where people typically make expensive mistakes in 2026.

Two paths, one to a pension building and one to a 401k office, symbolizing Florida retirement asset choices

The Tax Trap Most Floridians Walk Right Into

Here's the trap: taking a lump-sum distribution instead of rolling the funds into an IRA.

When you receive a QDRO distribution directly, that money is taxable income in the year you receive it. At 2026 tax rates, a $150,000 distribution could easily cost you $35,000-$45,000 in federal taxes alone, depending on your other income.

The one silver lining? QDRO distributions are exempt from the standard 10% early withdrawal penalty, even if you're under 59½. So you'll only pay regular income tax: not the additional penalty that typically applies to early retirement withdrawals.

But "only" paying regular income tax at elevated 2026 rates is still a significant hit that could be avoided entirely with proper planning.

As we discuss regularly on The Closing Few podcast, the decisions made during major life transitions often have the longest-lasting financial impact.

Smart Rollover Strategies to Defer the Tax Hit

The most powerful tool in your QDRO tax toolkit is the direct rollover.

Instead of taking a distribution, instruct the plan administrator to transfer your QDRO funds directly into an IRA in your name. This keeps the money in a tax-deferred account, meaning you won't owe a penny in taxes until you actually withdraw funds: presumably in future years when you can control the timing and amounts.

Here's a strategic approach for 2026:

Step 1: Establish a Traditional IRA before the QDRO is processed

Having the account ready prevents delays and ensures a clean transfer.

Step 2: Request a direct trustee-to-trustee transfer

This is critical. If the check comes to you first, the plan is required to withhold 20% for taxes: even if you plan to roll it over within 60 days.

Step 3: Plan your future withdrawals strategically

Once funds are in your IRA, you control when you take distributions. Work with a financial advisor to create a tax-smart retirement income plan that minimizes your lifetime tax burden.

Step 4: Consider Roth conversions in lower-income years

If you anticipate having a lower-income year (perhaps you're between jobs or reducing hours), that might be an ideal time to convert some traditional IRA funds to Roth: paying taxes at lower rates and securing tax-free growth going forward.

A golden nest egg protected under glass, showing tax-deferred IRA rollovers as a smart QDRO strategy in 2026

Working With Professionals: Your QDRO Dream Team

Navigating a QDRO isn't a DIY project. You need coordination between several professionals:

Family Law Attorney: Drafts the QDRO language and ensures it meets plan requirements

Financial Advisor: Helps you understand the long-term implications of different division scenarios and rollover strategies

Tax Professional: Models the tax impact of various options specific to your situation

Plan Administrator: Approves and implements the QDRO

At Davies Wealth Management, we frequently work alongside divorce attorneys to help clients understand what different settlement structures actually mean in after-tax dollars. The difference between a "fair" split on paper and an optimal outcome after taxes can be substantial.

Don't forget to coordinate your estate planning documents as well: beneficiary designations and powers of attorney often need updating during divorce proceedings.

Next Steps for Florida Residents Facing Divorce

If you're in the middle of: or anticipating: a divorce that involves dividing retirement assets, here's your action plan:

  1. Get a current statement of all retirement accounts (both yours and your spouse's)
  2. Understand the plan rules for each account regarding QDROs
  3. Model the tax implications of different division scenarios before agreeing to terms
  4. Open a rollover IRA in advance to ensure a smooth direct transfer
  5. Review your complete financial picture including Social Security benefits, insurance needs, and estate documents

The goal isn't just to survive the divorce financially: it's to position yourself for long-term financial security despite the setback.

Divorce is already emotionally and financially draining. Don't let poor QDRO planning drain your retirement accounts further through unnecessary taxes. With proper guidance, you can split retirement assets fairly while keeping the IRS from becoming an unwelcome third party to your settlement.

Questions about navigating retirement account divisions in Florida? The team at Davies Wealth Management specializes in helping Stuart, Jupiter, and Martin County residents protect their wealth during major life transitions. Reach out for a consultation tailored to your specific situation.