Don’t let your retirement savings vanish into thin air during divorce.
Here’s the truth…
Divorce is brutal on retirement accounts. They are often the largest marital asset that is subject to division upon divorce. And without some smart planning, years or even decades of retirement savings can be lost.
The good news? Protecting retirement assets during divorce is possible with the right planning and divorce legal services.
In this article, you will find:
- The Impact of Divorce on Retirement
- Common Retirement Accounts and Division
- What Is a QDRO and Why You Need It
- Protect Your Retirement Assets with These Strategies
- Mistakes People Make and Pay Thousands
The Impact of Divorce on Retirement
Divorce smashes retirement savings.
Period.
A study published in the Journals of Gerontology found that both men and women experienced a 50% wealth reduction as a result of divorce. That’s right, HALF of the wealth, gone. Divorce can do that.
But it doesn’t stop there…
In the same study, women age 50+ experienced a 45% reduction in standard of living as a result of divorce. Men experienced a 21% reduction. That’s how divorce devastates retirement accounts. A “fair” settlement strips away financial cushions and shoves both parties into an uncertain future.
Gray divorce (divorce at 50+) has doubled since 1990 and is on the rise. In other words, more and more people are going to need retirement account division in the future at precisely the time when those assets are needed the most.
Working with an experienced Virginia divorce lawyer is not only important in divorce, but crucial when it comes to the division of retirement funds. That’s because how that division takes place has an immense impact on long-term financial security. The process is convoluted and must be followed precisely to avoid tax penalties and losses.
Common Retirement Accounts and Division
There are several types of retirement accounts, each with different rules and regulations.
401(k), 403(b) and Employer Plans
Division of these types of plans require a court order. It is called a QDRO and must meet the requirements of the plan or penalties apply.
Traditional and Roth IRAs
Division of IRAs does not require a QDRO, but the division must be specified in the divorce decree. If the division is not clearly stated, taxes and penalties apply.
Pension Plans
Pension plans are often overlooked or given little value during a divorce. This can be a costly mistake. A spouse may be entitled to a share of the other’s pension or may have an option to receive a present value payment. Most pensions require a QDRO.
Military and Government Pensions
Military and government pensions are much more complicated to divide than private pensions. There are different rules which apply.
What Is a QDRO and Why You Need It
A QDRO (Qualified Domestic Relations Order) is a legal order approved by a court that divides a qualified retirement plan during divorce.
Essentially, a QDRO is a set of instructions for a retirement plan administrator to know how to divide a 401(k) or similar account in divorce.
This is why it’s so important…
Failure to prepare a QDRO for a retirement plan can result in tax penalties, loss of a portion of the account, or even disqualification from receiving any of the account. The administrator will not move any assets without a QDRO.
Here is how the process works.
- Divorce decree specifies how retirement accounts will be divided.
- A QDRO is prepared and submitted to the court for approval.
- The approved QDRO is sent to the retirement plan administrator.
- The funds are distributed according to the terms of the QDRO.
Note: It is extremely important to get the QDRO right the first time. Many divorce lawyers recommend that it is prepared at the same time as the divorce settlement. Waiting after the divorce has been finalized is a recipe for disaster.
Protect Your Retirement Assets with These Strategies
Retirement assets must be protected in divorce, but this requires thought and planning. There are proven methods to make this happen.
Know All the Facts
Start with a complete financial picture of the marriage. This includes all retirement accounts, their values and how they have grown. Many people do not realize that only the portion of an account earned during the marriage is considered marital property.
Plan with Taxes in Mind
Comparing a $100,000 traditional IRA with a $100,000 Roth IRA is not an apples to apples comparison. The traditional IRA will be taxed upon withdrawal, while the Roth will not. Remember to use after-tax value in negotiations.
Swap Assets Instead of Dividing
In some cases, it makes sense to trade retirement assets for other types of property. For example, trading the entire 401(k) for more equity in the house or investment accounts. Asset swaps can be a simple and fair solution to retirement account division.
Get Accurate Valuations
Pensions and defined benefit plans often require outside valuations to determine true worth. Their value may not be clear. Pension plans are often given little value in divorce. You must know the value to protect your interests.
Update Beneficiary Forms
Beneficiary forms on retirement accounts need to be updated after divorce. The divorce decree will not automatically change the beneficiaries. Forgetting this one step can result in an ex-spouse inheriting the account.
Mistakes People Make and Pay Thousands
Avoid these costly mistakes at all costs.
Hurrying the Settlement
Divorce is always stressful. Settling as quickly as possible sounds good in theory. However, in that rush, people overlook important aspects of retirement accounts. Retirement accounts are the largest marital asset in most divorces. Don’t rush the settlement.
Neglecting Social Security Benefits
A divorced spouse married for 10+ years may be entitled to receive up to 50% of an ex-spouse’s Social Security retirement benefit. Many do not realize that this option exists.
Going it Alone
Divorce legal services exist for a reason. Retirement account division is tricky. It involves federal law, tax regulations and state specific requirements. Going it alone is not a wise financial move.
Delaying the QDRO
Waiting until after the divorce is final to get a QDRO is not a good idea. For example, what if an ex-spouse dies, remarries, or spends the retirement benefit before the QDRO is qualified. The money will be gone.
The Bottom Line
Divorce upends all retirement plans. Assets accumulated over many years get divided in months.
The stakes are high…
Retirement accounts are often the largest portion of a marital estate. How those accounts are divided dictates financial security for both parties in the future.
Keep these in mind:
- Be aware of every retirement account in the marriage.
- Understand the specific rules for each type of retirement account.
- Prepare a QDRO and move quickly.
- Work with professionals who know retirement asset division.
- Update all beneficiary designations after divorce.
Protecting retirement in divorce is not a battle of winners and losers. The goal should be to ensure that both parties can move on with financial security. With the right approach and the proper legal guidance, it is possible.
