Retirement accounts are often one of the largest assets to divide in a divorce. Make sure that you divide them properly.
Are you concerned about how your divorce will affect your financial future? Are some of your largest assets, after the equity in your home, retirement accounts?
Your retirement accounts may not be assets that you think about frequently. Automatic deductions from your wages or a bank account generally fund these accounts and require little oversight.
Before you can start negotiations to divide these accounts, you need to do some research to find out what you have. Here are some initial questions that you need to answer. Do you have a defined benefit (pension), IRA or defined contribution 401(k) or 403(b) account? Are there any retirement accounts from prior employers that you forgot to roll over?
You may even want speak with a retirement plan administrator about the types of disbursements and distributions allowed and any tax consequences.
Qualified domestic relations orders
Ignoring these four words can be a costly mistake. A qualified domestic relations order, also called a QDRO, will help you divide retirement assets. Your divorce decree will probably include the basics of your agreement – i.e. “husband and wife agree to divide the retirement accounts equally,” but a QDRO is generally needed to actually transfer the assets.
Request a model copy of a QDRO from a plan administrator and give it to your attorney for review. You will want to complete the QDRO at the time of the divorce, because the judge and plan administrator each need to sign this order. The QDRO also needs to be finalized before you can receive funds from an account. Almost half of all couples need a QDRO to divide retirement assets through a divorce.
Care in drafting
The details of a QDRO are very important. For example, it is important to address surviving-spouse benefits with a pension. If the QDRO is silent on this issue, a wife might receive nothing if her ex-husband dies before pension payments begin.
How you write up an agreement also matters. Assume a 401(k) account is worth $150,000 at the time of divorce. The parties agree to equally divide the account, but make the mistake of writing out that wife will receive $75,000. If the market falls weeks later and the value of account plummets to $100,000, the husband only receives $25,000 not the half he agreed to.
Taxes
When you split the funds in a 401(k) with a cash payment, the Internal Revenue Service requires that you do so at one time. If you do not use the correct procedure to transfer or rollover funds from retirement accounts, you could owe unexpected taxes and early withdrawal penalties.
Each situation is unique and you cannot leave your financial future to chance. For this reason, it is important to seek the counsel of a detail-oriented family law attorney.
Keywords: QDRO, retirement accounts, divorce, family law.