Pitfalls to Avoid When Dividing Up Retirement Assets

As you and your partner divorce, you’ll be dividing up debts and assets. Retirement assets usually cause the most confusion.

In some cases, only one person is contributing to those accounts, so some assume that asset belongs to the person who contributed. If both spouses work and each have a retirement account, both parties assume the two will take what theirs and go their separate ways. But neither of those may be true. Retirement benefits are considered marital property. The spouse who works part-time or doesn’t work outside the home may be relying on that 401(k), too.

What is a “Quadro”?

The first step is to speak to a family attorney or CDFA about your specific retirement assets. He or she can then guide you on what assets you need to ask for in the divorce. One term you will probably hear is a “quadro,” which is a way of saying QDRO, an abbreviation for Qualified Domestic Relations Order.

Let’s say you’re the spouse who works part-time and in the divorce, it’s decided that you will get a portion of your spouse’s qualified retirement plan. Examples of qualified retirement plans are 401(k)s 403(b)s, and pension plans. As you know, you normally can’t take money from a retirement plan without penalty until you are 59-1/2. A QDRO is what allows you to transfer some of that money early in your name without taxation.

IRAs

IRAs are different and don’t normally use a QDRO to separate them. You might hear instead about a similar document called a “transfer incident to divorce.” And in some cases you may just need to provide a copy of your separation agreement.

Speak to an attorney about filing the correct documentation, especially if you are dealing with multiple, different retirement accounts.

Dividing Retirement Assets: Common Mistakes to Avoid

• Wrong Timing – An IRA transfer like this is usually outlined in the divorce decree or property settlement agreement. These types of transfers are not considered taxable. But some parties are so busy dealing with child custody issues and the house that retirement assets are ignored and then managed poorly, causing one party or both to pay taxes. Timing is an important part of this process; the money cannot be transferred until the divorce is final.
• An Even Split – If two parties agree to split the 401(k) evenly, they might assign $75,000 each of a $150,000 pot. But if the market bottoms out during the process, the account owner will get $75,000 and the other party will get whatever is left. Be sure to split the account based on a percentage instead.
• Beneficiary Changes – Once everything is settled, be sure to update beneficiary designations for that account. No matter what your Will or anything else says, some pension plans and annuities are governed only by beneficiary designation documents. If yours still lists your ex-spouse, he or she is the one who will receive that money.

Confused about retirement assets? Join us for our Second Saturday divorce workshop each month.