There are so many things to consider when navigating through the divorce process. Retirement assets (including contributions, interest, and growth) that are funded during the marriage may represent a significant portion of marital assets but may get the least amount of attention.
Many times in a divorce there is an agreement made regarding splitting retirement plans or pensions. Since your divorce settlement agreement does not fully protect your portion of your soon to be former spouses’ retirement plan, it’s vital that you look to use a properly prepared legal order known as a QDRO. A QDRO (Qualified Domestic Relations Order) serves to divide a retirement plan or pension into two parts giving each person separate ownership. This allows each person to decide what to do with this particular asset.
Some important items to consider when working through retirement plan assets in a divorce include:
Show me the money
Once a QDRO has been established the tax code allows for monies to be distributed in a lump sum directly to the ex-spouse without paying the 10% penalty imposed by Uncle Sam. Keep in mind that ordinary income taxes would still be due. This is especially important to think about if you are needing access to these dollars prior to retirement. If you are in need of money prior to age 59 ½, taking a lump sum distribution might be an option, however, you will need to do this prior to rolling any of the monies from a QDRO into an Individual Retirement Account or IRA. Once money has been rolled into an IRA, if you need a distribution for an unqualified expense, you could face that 10% penalty.
Timing is everything
Since dividing up assets in a divorce, especially as it relates to retirement plans can take time. On average, it can take 3-6 months before you may see the money. If funds are needed for either current income or to pay expenses like legal fees, this probably should not be your go-to source for immediate needs.
Don’t make any assumptions
Not all plans are not the same so it is critical to work with your advisers to make sure you are making the right decision for you. As an example, some plans such as military pensions, federal, state, county and city plans may have there own rules. The guidelines in retirement plans can vary and be complex so ask questions to gain a full understanding of how things work.
Who makes the final call
While a judge can order a QDRO as part of the settlement, ultimately the plan
administrator has final authority. Your divorce team should be carefully examining the details and determine what the ex-spouses’ plan allows in order to ensure that the order meets the criteria to be “qualified.” This helps you be prepared for any penalties or restrictions involved.
Don’t put it off
The importance of drafting the QDRO concurrently with the divorce proceeding cannot be overemphasized. Pensions should be finalized at the same time as the other non-pension items and a QDRO should be drawn immediately. Your separation
agreement alone does not protect your benefit.
Teamwork makes the dream work
Assembling a core team of advisors that will help you optimize the best post-divorce outcomes becomes your first step in the divorce process. Pensions, non-pension assets, legal orders, taxes and long-term financial independence becomes your teams #1 priority!