When a couple decides to end their marriage, they primarily worry about being forced out of the family home or losing custody of their children. While most individuals spend time fighting about property, they often fail to think about their retirement or pension plan. Retirement divorce assets may be divided equally in a community property state. One way to protect these assets is to obtain a court ordered Qualified Domestic Relations Order (QDRO), which instructs the pension plan regarding how to pay out your share of the plan benefits. This option is only available to tax-qualified income covered under the Employee Retirement Income Security Act (ERISA) and do not include military or government pensions.
Protecting Your Pension
Retirement divorce plans, whether they are a 401K or IRA are becoming a key battleground in many divorce settlements. Trying to divide these assets can be extremely complicated, and if you don’t know what you’re doing, you risk losing much of your golden years financial support.
A QDRO can give you protection that a marital settlement will not. This domestic relations order must be approved by the retirement plan’s administrator as well as the court. The QDRO establishes your ex-spouses legal rights in receiving a designated percentage of your benefit payments. Once the ex-spouse becomes entitled to legally receive these monies, he or she will be responsible for paying any related income taxes.
If you fail to get a QDRO, any money that is distributed to you will be taxable. This means that you will own the Internal Revenue Service (IRS) for money that actually winds up in the pocket of your ex-spouse. In addition, you may be subject to the early withdrawal penalty of 10% if you are under age 59 and a half.
IRA Accounts
If you are splitting up your IRA account, you can roll over money tax-free to your former spouse by setting up an IRA for him or her if the transfer is required by the divorce settlement. At that point, your ex will be responsible for paying the taxes.
There are basically two options for dividing retirement benefits:
- Present day valuation buyout
- Dividing them into two accounts
The spouse who does not have retirement benefits can take the present-day value of his or her interest in the retirement benefit and trade it for something else of similar value.
Divorce Lawyers & Pension Analysts
When you are faced with dividing a retirement account, it is advised that you hire a professional who specializes in pension disbursement. When you seek legal guidance from a divorce attorney, they will be able to examine your case and make recommendation about what you need to do to protect your retirement funds that you worked hard to accumulate.
