Dividing the Retirement Assets in a divorce can be complicated. It is important to review the following list of questions so you do not miss out on a retirement benefit.
- What is the market value of the retirement accounts as of the Date of Separation?
- How much of the retirement account was earned during the marriage?
- How long have you been married? It does not matter whose name the retirement benefit is in if it was earned during your marriage. Your portion could be greater if the retirement plan can be used to offset a distribution.
- What is the gross income before retirement plan contributions? Do not base alimony on the income after your spouse has made retirement plan contributions.
- How are you planning on supporting yourself at Retirement? Even if you are not near retirement age, you should still be thinking long term and how you are planning on supporting yourself.
Think about the ten minute, ten month and ten year rule. Right now you are trying to get through the next ten minutes and ten months. But retirement comes under the ten year rule. In Financial Planning, you need to evaluate your cash flow for the rest of your life.
- What happens when alimony or child support runs out?
- Are you able to make contributions to a retirement account?
- Do you have to take required minimum distributions at 70 ½ or is it a ROTH?
The mechanics in separating your retirement account from your spouse are complicated depending on the type of retirement account.
- A QDRO or Qualified Domestics Relations Order is the method used to divide the retirement account or get the money rolled out into another retirement account in your name. A QDRO is used to divide equally or unequally the Defined Contribution pension plans, Defined Benefit pension plans, 401(k)s, thrift savings plan, Keogh plan, annuities, some profit sharing and ESOPs. A Lawyer or QDRO specialist needs to do the QDRO which goes to the Plan Administrator to get your retirement account portion rolled over to another IRA. This could take two or three months before the money is separated. Each plan can be unique with its own paperwork, so it is important for you or your lawyer to be in contact so it is done correctly the first time. It is also important for the QDRO to be drafted before the Divorce Decree so that both can be entered in court. The Rollover needs to be put in another account within 60 days or it becomes taxable.
The QDRO provides for the survivor benefit for the alternate Payee (former spouse).
If the retirement plan is not part of a 401k and already a rollover IRA, then a QDRO may or may not be necessary. This is addressed in the divorce decree. Always defer to the lawyer and the administrator of the retirement plan.
- Under the tax code, 72(t) allows you to take part of your spouse’s Retirement account in certain circumstances. You may have a one time opportunity to take a lump sum withdrawal at any age without paying the 10% penalty. This is when the 401k account is being separated due to the divorce with a QDRO. Not all employer-sponsored retirement plans will qualify for this QDRO method but it is worth looking into. In addition, you will have to pay income taxes on it. However, this is a time to get access to the retirement money if you need to. This only confirms the importance of planning your future cash flow. You may not think you need the money now but it might make sense to withdraw a portion for an emergency fund, house payment or legal fees.
- The Defined Benefit or Pension Plan that is being divided may not necessarily include the portion before marriage. It has no cash value today if you or your spouse have not retired but it is an obligation to pay the retired employee a monthly amount. It is complex to value and uses a present value calculation varying depending on interest rates. However, this needs to be done to reach a fair division of assets.
Dividing retirement plans is complicated and you need to get legal and financial advice to make sure it is done fairly. After the divorce is not the time to realize that a QDRO is needed or that you overlooked some retirement benefits. This is an area that you need to do your homework or hire somebody to do it for you. Your lawyer, C.P.A. and financial planner should all be part of the process.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situatiojn with a qualified tax or legal advisor.