When it comes to divorce and property division, retirement accounts often get overlooked. Since the divorce rate for individuals age 50 and older is at an all time high, it is more important than ever to understand the rules that govern the division of retirement accounts in divorce.
Retirement accounts, like pension plans and 401(k)s, can be subject to the court's property division process and the divorce decree like other assets. If divorcing parties cannot agree on how to divide their retirement accounts, the court may divide the amounts accrued during the marriage as set out under state law. A central component in enforcing the division of a retirement account is a Qualified Domestic Relations Order.
A QDRO establishes a former spouse's right or another person's right to receive a portion of your employer-sponsored retirement benefits. A retirement account may also be the source of funding for a child support order or spousal maintenance order. QDROs also protect retirement account owners from early withdrawal penalties on funds transferred to other individuals and also protect against tax penalties.
A QDRO must set out the method that the retirement account funds will be divided under. Common considerations include whether the portion to be received will be a percentage or dollar amount and whether the gains or losses of the total investment will be shared equally or disproportionately until funds are transferred. For the payee, it is also important to stipulate that the account owner cannot withdraw funds or take out loans against the account until the money is divided.
Another issue to consider in the division of a retirement account is survivor benefits. If a QDRO is created before the account-owner retires, an ex-spouse can be awarded a separate interest that will ensure he or she will be paid as long as he or she lives. If divorce occurs after the account-owner retires or if the ex-spouse waits until that point to file a QDRO, the ex-spouse may receive a shared interest in which the payee will receive funds throughout the lifetime of the account-owner.
An experienced divorce attorney can help guide an individual contemplating divorce through the division of a retirement account and the creation of an effective QDRO.
Source: The Wall Street Journal, "How to Split a 401(k) in a Divorce," Anne Tergesen, June 2, 2012