Retirement Planning After Divorce
The division of assets is a major concern for both parties going through a divorce. Often times, partners work together towards common financial goals, but that doesn’t always mean the contributions are equal. One of the more cumbersome assets to divide in the course of a divorce are retirement savings accounts. This is for several reasons: usually this is the largest sum of money between a couple, and it also is subject to the toughest penalties. Therefore the division of retirement accounts ranks among the top three things that couples argue about in a divorce, according to a 2016 American Academy of Matrimonial Lawyers survey. Should you find yourself in the midst of a divorce, it is important to understand the differences in retirement accounts and your claim to them.
If your ex- partner has a workplace retirement plan, commonly referred to as a 401K, you may be entitled to part of it as retirement funds added during the course of your marriage are typically treated as marital property. Should you get married and they already have money in a 401(k), that is considered separate property and will not be included in the dividend amount.
Consult your lawyer, and if you have a claim, you will be able to access your portion through a Qualified Domestic Relations Order (QDRO). This order is separate from your divorce agreement, and it is required that one be completed for each retirement account that is being split. You have 2 options in this case: you can transfer the money from the retirement account in question to your personal account– this will prevent taxation on either end of the transaction, OR you can opt to receive the funds outright. Often times in the case of divorce finances are tight and parties find themselves in need of cash. Should you choose to take the money, you will be exempt from paying the 10% withdrawal penalty, but the funds will still be subject to taxes. It is important to note that if you anticipate filing for bankruptcy, assets in a 401(k) are protected from creditors.
If you will be receiving funds from a 401(k), it is essential the beneficiary on the account remains the same until the divorce is finalized. This ensures that until your divorce no names may be added or removed from the account without your consent. It is also essential to specify how the account will be divided in your QDRO– it is recommended that you express the amount as a percentage vs. a fixed dollar amount as gains or losses may affect your final number. It should also detail “how” you will receive the money, as a lump sum, monthly payments, etc. NOTE: military pensions, federal, state, county and city retirement plans have special rules regarding division during divorce, your lawyer should be able to provide you with more information.
Individual retirement accounts (commonly known as IRA’s) differ from 401(k)s as the rules surrounding their division are governed by state laws, not federal. They do not require a QDRO for division of assets, it can be done in the divorce decree, however you should ask your lawyer for information specific to the state in which you reside. Should you be listed as a beneficiary on your ex-spouses IRA account(or vice versa), you will need to approach your financial institution to complete the proper paperwork.
As with the case of 401(k)s, you have the option to take the money, or you may set up a rollover IRA account. If you choose to take the cash, the money will be taxed as income, and may potentially incur early withdrawal penalties if you are under the age of 59½. Roth IRA’s are treated a bit differently as the contribution has already been taxed, however you can still face penalties for early withdrawal.
While the division of retirement accounts can feel complex, it boils down to two key components: 1) Knowing which assets you have claim to, and 2) Determining if it is more beneficial to do a transfer of assets vs. a withdrawal. The decisions you make will be reflective of your financial situation– should you be unsure of what the future of your finances look like it is a good idea to talk to a divorce accountant. Their responsibility is to guide you in divorce budgeting, and help prepare you for your new financial situation. Based off their estimates, sometimes it makes more sense to take the assets and use the money towards a new home, vehicle, etc., but overall it is recommended to keep the retirement money in a new account in only your name if possible.