Splitting retirement accounts during divorce: what you need to know
In some cases, a QDRO is required to receive payment from a retirement account after divorce.
February 25, 2014
Splitting retirement accounts during divorce: what you need to knowArticle provided by Michael D. Schmitt, Attorney at Law
Visit us at http://www.michaelschmittlaw.com
A divorce is more than just the split of a romantic relationship; it also symbolizes the end of a financial partnership. As such, property and assets are split during the divorce proceeding. This includes real, tangible propertylike the family home, various possessions, cars and savings accounts as well as debts in addition to the less tangible, like retirement accounts.
Those going through a divorce should take the time to consider how retirement assets are split in the final settlement. This is particularly important for those who divorce after spending a good amount of time in the workplace. Retirement accounts that are funded during a couple's early years, such as when they are in their twenties and thirties, compound. This means what may have seemed like a small investment at the time will lead to major payoffs during retirement. As a result, it is wise to have at least a portion of this asset distributed to each spouse after the divorce is finalized.
How are retirement assets distributed?
According to the Department of Labor, over 46 million workers have employer-provided retirement plans. In many cases, special steps are required to ensure one receives payment from these plans after a divorce.
Generally, it is best to leave retirement assets untouched until reaching the age of retirement. Although money can be withdrawn prior to this time, potentially during the divorce proceeding, it often comes with steep penalties. Instead of paying these fees, steps can be taken to help ensure that each individual receives the agreed upon amount or portion of the account at a later date.
The most notable way to legally establish this right is with a QDRO. A QDRO, or qualified domestic relations order, is a legal document that specifies how the retirement assets will be distributed upon retirement. In most cases, 401ks, employee stock ownership and profit-sharing plans require a QDRO to distribute payments to an ex-spouse. This document solidifies the right of an "alternate payee," someone other than the person listed on the retirement account, to receive payments from the plan. The document also outlines the percentage or formula used to calculate how much the ex-spouse will receive at the time of payment.
It is important that couples going through a divorce take all aspects of property distribution into consideration. The magnitude of this determination can be overwhelming, making it wise to contact an experienced property division lawyer to help better ensure your interests are protected.