Divorces often see a division of assets. Bank accounts, cars, and homes are subject to a fair and equitable distribution. However, what many people don’t realize is that retirement assets are also available for distribution. The ex-spouse may be designated as an Alternate Payee and receive up to 50% of the retirement funds. Here’s what you need to know if you find yourself in such a situation.
The legal name for assets which are subject to a divorce agreement is marital or community property. Although state laws differ as to what is included in martial property, retirement accounts are definitely on the list. This includes popular accounts like IRAs, 401ks, 403ks, ESOPS, and military pensions. Keep in mind that often times a spouse may have more than one retirement account. Make sure that you have a complete list before completing any divorce agreement.
Assuming the marital property will be divided equally between the two parties, the most common approach is to ascribe a dollar value to every asset and then to divide them accordingly. In other words, if both the marital home and the 401k are worth $500,000, then typically one spouse would receive the home while the other gets the 401k. The retirement account itself can also be divided by using a QDRO (see below.)
Alternatively, both assets can be sold or cashed out (if possible) with the proceeds being evenly split. Although these approaches sound relatively simple, there are a number of points that you should keep in mind.
If you want to divide the retirement benefits themselves, then you’ll need a QDRO – Qualified Domestic Relations Order. This is a special document prepared in addition to the divorce agreement. It specifically allows for an ex-spouse to be designated as an Alternate Payee and allows him/her to receive a share of the retirement benefits.
The QDRO is important as it allows for a legal transfer of the benefits without incurring any penalties. The document is normally written by one of the participating attorneys, signed by a judge, and then sent to the plan administrator.
Before submitting the QDRO make sure you and your lawyer read it over for accuracy. Like any legal document, the details are very important. Also keep in mind that the retirement plan provider might charge fees for enacting the QDRO. These fees should be taken into account when dividing assets.
Retirement benefits often follow their own unique set of tax rules, and this doesn’t change when they are divided up as part of a divorce agreement. Here are four points to keep in mind about tax liability.
If you choose to rollover the retirement funds into another retirement account, keep in mind that the choice of accounts is now open to you. You can simply rollover into a standard IRA with one of the big brokerage houses, or you can take advantage of your newfound freedom and go Self Directed. Here at Broad we specialize in Self Directed retirement plans, and we can help make your transition easy and productive.
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