What Happens to Your Retirement Savings In A Divorce?
Retirement assets are often the single biggest asset for many divorcing couples today, and if enough attention isn’t paid to the small stuff – the consequences can be dire. Here is what you must know before you sign off on an agreement or settlement with your soon-to-be ex.
QDROs: The earlier the better
A Qualified Domestic Relations Order (QDRO) must often be drawn up to divide key retirement assets and avoid tax implications in the division of such assets. In case your divorce is finalized before this has been agreed to, you may later discover that something you had banked on in is not implementable and you have no recourse since the divorce is now final. For instance, if you hope to get a lump sum payment from their pension plan, but discover that the plan won’t make a single big payout and will instead draw out payments across several years, you may find yourself stuck without the money when you need it. And you won’t be able to rework the plan to get other assets in lieu of this either.
The devil is in the details
One common error is to look at the account at current market conditions and define a set dollar value that a partner gets without mention of market or earnings/losses impact. Later, if the account is worth much less (or more) at the time of maturity, it could result in one of the two getting more (or less) than their fair share. For instance, an account with $250,000 dollars today with the wife due to get $125,000 might seem fair. However, if the account is suddenly down due to the volatility in the economy, the entire account may only be worth $150,000 and she will end up with $125,000 and her partner with a paltry $25,000.
Consider tax implications
It is important to look at the tax implications of whatever agreement you finally come to. Work with a financial consultant if need be, or better yet, hire an attorney with expertise in this area. An IRA division for example, will have to be specifically labelled in the agreement as a transfer incident to divorce, to avoid tax on the transaction. If you don’t you and your ex may end up owing taxes in addition to an early withdrawal penalty in some cases. And all to fund your ex’s share of the money.
Hire the right divorce attorney
Not all divorce attorneys have the time to focus on retirement assets, because much of their attention will be geared towards handling what they see as bigger issues like child custody or spousal support negotiations. For instance, they will need to be well versed with QDRO law. This will mean they need to have expertise in drawing up agreements on things like pensions and 401 (k) as well as other retirement assets. They should be able to distinguish between the nuances of both. While the former will involve looking at things like what pension they will draw as a surviving spouse, the latter may have to factor in market losses and earnings.
Getting divorced in California can be complicated. Download our free eBook, 18 Important Things to Know About California Divorce to educate yourself on the process.