Retirement Accounts and the Divorce process

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Getting an attorney that understands retirement accounts and the division of them is one of the most important things in a divorce, and even more so, when there are large sums of money at stake. Going through a divorce is not easy, no matter how amicably it may go. Your life has forever changed and that likely includes a huge change to both your present and future finances.

Retirement savings can be one of the largest and most valuable assets many people own; therefore, they are a particularly important issue in divorce proceedings. The determination of splitting retirement assets can be one of the most difficult aspects of divorce, as they may be subject to tax implications and hypothetical values, and they are often handled improperly. All sums in a party’s retirement account accumulated from the date of marriage to the date of divorce would likely be considered community property, including military retirement. Whether you have been married for three months or ten years, your spouse retains a 50% interest in the sums acquired during the marriage.

IRAs are divided using a process known as transfer incident to divorce, while other qualified plans are split under a court ordered Qualified Domestic Relations Order, commonly known as a “QDRO”. A QDRO is a court order, judgment, or decree that can protect your interests under divorce circumstances and is the document that instructs your spouse’s retirement plan on how much to pay you for your share of your spouse’s retirement benefits, as ordered in the Final Decree of Divorce. There are many times when even attorneys can make mistakes when splitting up retirement accounts.

A Domestic Relations Order is not considered Qualified unless it’s been approved by the retirement Plan Administrator and the court. While many retirement plans often have standard QDRO templates that a lawyer can use to draft a QDRO, you should always consider using an attorney who is aware of the QDRO process and requirements to ensure that your rights are fully protected. If your attorney is not experienced in QDROs it will take them longer to do research and they could end up preparing the incorrect documents. This will then cost you more in attorney’s fees and could cause something important to be missed that could end up forever costing you money.

There are many times wherein a divorce is finalized, the Final Decree is signed by the judge and the corresponding QDRO was never even prepared by either attorney. This can cause many problems down the road and can even cause you to lose 100% of your award of your ex-spouse’s retirement account. If the QDRO is not submitted by the time the participant retires, the payments will go directly to the participant and then the participant becomes the trustee of those funds. You will then be forced to seek enforcement through the court against your ex-spouse, this possibly costing you thousands of dollars in attorney’s fees. In addition, you will also be stuck with no guarantee that you will be able to recover those funds from your ex-spouse. In the end, you will then have to hire the attorney to prepare the QDRO that should have been done at the time of the divorce. The QDRO should always be completed and submitted at the time of the divorce and not at the time the participant retires.

It is important to be aware of the tax consequences and potential delays involved in the transfer of retirement funds when negotiating a divorce settlement. You want to ensure that you understand the exact value of the sum of money you are being awarded and when you will be able to access these funds. Defined contribution plan assets, such as 401(k) plans are easier to calculate than defined benefit plan assets, like pensions. The payments of a defined benefit plan are based upon complex actuarial calculations and factors such as years of employment. It may be difficult to calculate your share of the plan assets. Another issue to ensure you explore with your attorney and spouse is whether there are any outstanding loans against any retirement accounts either party is awarded. If either spouse is awarded a portion of a retirement account, you need to ensure that the repayment of any outstanding loans has been properly accounted for.

Once the QDRO or any other required form is processed and accepted, the receiving spouse will take legal ownership of the assets and will be assuming sole responsibility for the tax consequences of any future transactions or distributions. The receiving spouse may roll the assets into their own qualified plan if they desire to do so. A transfer from a qualified plan pursuant to a QDRO is not subject to tax and penalty by the IRS. However, you will need to confer with a tax attorney or tax account if you need advice regarding the tax consequences of any future transactions or distributions, as a family law attorney will likely not be able to give advice on this topic.

Lastly, in the event of divorce, do not forget to update your beneficiary designations. Once you send or receive your retirement assets, be sure to add or update your beneficiaries. Your ex-spouse will probably no longer be one of your beneficiaries unless your Final Decree of Divorce requires it. After the divorce is finalized, it is recommended to re-evaluate your current financial situation with a financial specialist or financial planner, especially if larger sums of money are involved. While divorce can be costly in terms of attorney’s fees it can also have costly effects on your future financial security. Educating yourself is the first step, so be sure to take the appropriate legal steps to protect your rights and always employ a qualified legal team to help you do so.

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