Divorce can be difficult to navigate emotionally and it can also present financial challenges, especially when it comes to existing and future retirement plans.
Divorcing couples can face enough agony as it is dividing up possessions and agreeing on child custody, let alone splitting retirement assets. Yet that nest egg often represents a divorcing couple’s largest pot of money.
So what are the things you need to concern yourself with and how can you come to a settlement agreement you both find fair?
Elements of a Fair Settlement in Divorce
You’ll need to make informed decisions regarding the division of property and assets that you and your spouse accumulated during the marriage.
Before you can even begin to define what a fair settlement looks like, you need to understand the main elements that make up divorce settlements in the first place. These elements include:
- Child support and related expenses
- Alimony / spousal support / spousal maintenance
- Division of marital assets and liabilities and determining which assets are considered either the couple’s marital property or a spouse’s separate property
Dividing Up Retirement Assets
If the process for the division of your assets is not done properly, there can be a steep price to pay in taxes, penalties or an unintended amount of money going to an ex-spouse.
Retirement savings are one of the largest and most valuable assets many people own, and, therefore, are an important issue in divorce proceedings. In order to arrive at a fair division of the retirement benefits, it is important to understand how the accounts are valued and divided:
401(k): For the recipient of the 401(k) funds, it’s important that you do not agree to a change of beneficiary before the divorce is final. As long as you remain married, account owners cannot name anyone other than a spouse without your approval. Your 401k might be your most significant and complicated marital asset, especially if you’ve been married for quite some time and have been contributing to it consistently. That makes it marital property, just like a home you buy together. You can sell your home or refinance it to buy out your spouse’s equity without the approval of anyone but the court, but with a pension plan such as a 401k, your plan’s administrator becomes involved.
Pension Plans & Qualified Domestic Relations Order (QDRO): If you receive a pension plan, your spouse may be entitled to share that too. The rules for dividing it up vary, depending on whether you’re receiving it from an employer, the federal government, the military, or a state/local government. It can be difficult to value and divide a pension, and dividing a pension typically requires a document known as a QDRO. Federal Law requires a QDRO to divide certain retirement plans, but while a QDRO is not required to split up assets in an IRA (traditional or Roth), you still need to make sure the split is done properly so no tax or penalties are incurred.
Other Considerations: The court will take several factors into consideration when determining a fair division of a retirement account, such as the length of the marriage. For long-term marriages, retirement plans are usually split evenly.
Divorce can be costly be in terms of upfront attorney fees and emotional health. But it can also have costly effects on your future financial security. Be sure to take the appropriate legal steps to protect your rights and always employ a professional to help you do so.
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