There are a lot of things that need to be settled during a divorce: alimony, child support and visitation, marital property. But perhaps the most valuable asset, that is often forgotten about, is your spouse’s retirement account.
Despite the fact that the struggling economy has put a large dent in retirement, and people’s ability to save for retirement, the truth is that retirement funds are a big and booming business. Americans have actually been successful in putting away decent nest eggs, which can often amount to thousands of dollars. During your marriage it was assumed that any money put away into a retirement fund would be for the both of you. Therefore, if you’re now facing divorce, you should know you still have a right to some of that retirement fund.
FINANCES AND DIVORCE
During a divorce, it is advised that you make a careful inventory of your assets, including joint accounts, property, lines of credit, and debt. What often gets missed? Retirement accounts. The first thing you will need to do is locate and identify both yours and your spouse’s retirement accounts. If you’re able to speak with your spouse, try asking about these accounts. It’s not uncommon for a person to have more than one IRA or 401(k). This is especially true if they have had various jobs. If you’re not able to ask, or if they withhold that information from you, you or your family law lawyer may need to contact each employer individually to inquire about their retirement plans. It might be in your best interest to work with a lawyer as some companies might need a court order before they are able to release this type of information.
LAWS REGARDING RETIREMENT FUNDS
Once you’ve received the information regarding the existing retirement accounts, you will need to determine how much you are eligible to receive. Various laws apply to the types of accounts. IRAs are regulated by state laws, while 401k, pensions, etc., fall under federal guidelines. Your family law lawyer or accountant will be able to advise you on those laws and thus should be able to aid you in determining the exact numbers. A typical rule of thumb is that the split will be even but limited to the amount in the accounts that accrued during the time you were married until the time you separated. , or marital property rights for the benefit of a spouse, former spouse, child, or other dependent. It is a judgment for a retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent. The qualified domestic relations order (QDRO) needs to contain specific information, including:
- the participant and each alternate payee’s name and last known mailing address, and
- the amount or percentage of the participant’s benefits to be paid to each alternate payee.
After this document is drafted, it will be submitted to a judge for approval. A QDRO is not able to award an amount or form of benefit not available under the plan. The person receiving the QDRO benefits from a retirement plan reports the payments received just as if he or she were a plan participant. A benefit that is paid to a child or other dependent is taxed to the original participant in the plan. An individual receiving retirement plan monies under a QDRO may be able to roll over tax-free all or part of the distribution. If a person receiving QDRO payments is eithis the employee’s spouse or former spouse, then he or she can roll it over, just as if he or she themselves were the employee receiving the plan distribution.
IMPORTANCE OF QDRO
Retirement benefits have special legal requirements, which is why it’s important to draft a QDRO and not just rely on your divorce agreement to solve the issue of retirement accounts. In order to maintain the tax benefits that come with retirement funds (and be designated an Alternative Payee), you must go through a QDRO. It’s important that you sign and finalize the QDRO before you finalize and sign your divorce agreement. Working through the legalities of retirement funds after the divorce has been finalized can be time-consuming and possibly ineffective.
You also do not need to take the retirement benefits themselves, but instea,d use them as a dollar figure in your general divorce negotiations. For example, you would have the accounts reviewed and evaluated by a financial professional and then receive other assets in lieu of that value. So if the retirement accounts are estimated at $500k and the value of the house is $500k, you might decide to keep the house while your spouse gets the retirement account. If you do decide to take the retirement funds, it’s advised you roll them over into a new retirement account eithis in a standard market product like a mutual fund, or as a self-directed account. A mutual fund is easier, and the returns will be close to what others are seeing. The self-directed route requires a more attention, but allows you to move beyond Wall Street and perhaps invest in a property or business. Regardless of the step you take, do your research.
FINANCIAL ASPECTS OF DIVORCE
In addition to working through any retirement plan options you have, there are some other financial tips you’ll want to take when settling your divorce. According to chief economist at Moody’s Analytics in West Chester, Pa., Mark Zandi, “Divorce generally results in a significant financial setback for all those involved.” Don’t let your divorce set you back too far. Here are a couple of things to keep in mind:
- Itemize all assets and liabilities – property, lines of credit, debt, valuables like furniture, stock options, etc…
- Don’t fight over the house. Often times people overlook how much debt comes with a house in terms of mortgages, monthly and yearly upkeep, and utilities. It might be in both of your best interests to sell the house and split the headaches/profits
- Get a handle on your after divorce expenses. You’ll now be living off of one income or one spousal support payment, so you’ll be completely responsible for handling your own financial situation. This means any unseen costs are going to be coming out of your pocket, and your pocket alone. You’ll need to be an expert on your families finances, including: food, clothes and other essentials.
- Don’t seek revenge during the divorce. Going for everything your spouse has will just leave you with bigger legal bills and less money that you can split. Try to remain civil and keep the legal costs down.
- Don’t forget about tax time. There are various tax rules regarding alimony and child support payments. Make sure those considerations are taken into account when you are deciding on the division of assets. A financial planner or experience family law attorney will be able to advise you on the best way to not get hit during tax time.
- Once the divorce is final, don’t forget to remove your spouse from your will, change any health-care proxy or a power of attorney that names your former spouse, and change all your passwords.
WORKING WITH A DIVORCE ATTORNEY
If you are facing a divorce, you need to work with a divorce attorney that can take a look at your specific situation and advise you on all the aspects of divorce you will be facing. This might mean decisions regarding retirement funds, property, child support and custody, and alimony. A divorce attorney will work with you to help you decide how you want to tackle these elements of your marriage and divorce, while also providing guidance and support.
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