Key Things to Know about Your Retirement Assets in a Divorce

Summary: Divorce can significantly impact your retirement resources, so it’s vital you understand how these assets are handled during the divorce process. Receiving an equitable share during a divorce settlement is possible if you take the right steps.

When a marriage dissolves, it’s not just emotional and social needs that should be addressed; there are also financial implications to consider, such as the division of marital assets such as real estate (your home), savings accounts and retirement funds.

In this article, we’ll help you become more aware of how retirement assets can be divided in a divorce. We’ll start with what retirement plan accounts are and how they’re usually handled in divorce proceedings.

Understanding retirement plans

Different retirement plans have specific rules governing their division in divorce. Understanding what rules apply to retirement plans during division is crucial for protecting your rights.

Of the many types of retirement plans, the two main types are qualified and non-qualified plans. Qualified plans are employer-sponsored plans which must adhere to the Employee Retirement Security Act of 1974 or ERISA, that was enacted primarily to secure workers’ retirement incomes.

Common qualified plans are 401(k) and 403(b) plans, as well as defined benefit plans (pensions or annuities).

Non-qualified retirement plans, such as Individual Retirement Accounts (IRAs) on the other hand, are set up for incentivizing some key employees and fall outside ERISA guidelines. Remember that qualified plans offer ERISA protection, unlike non-qualified plans.

How retirement plans are treated during a divorce

When a marriage ends, retirement benefits including retirement savings are often split as part of the divorce process. This is done through a court judgment, decree or an order approving the settlement of assets accumulated during marriage.

The type of order may differ for qualified and non-qualified retirement plans:

Qualified Domestic Relations Order (QDRO)

If one of the spouses has qualified retirement account(s), a Qualified Domestic Relations Order (QDRO) may be used to divide these assets. A QDRO is a court order that allows for the transfer of funds inside qualified plans without tax or penalty consequences.

This is sometimes referred to as establishing “an alternate payee” and guarantees that both parties receive their fair share of the qualified plan. Why is a QDRO needed?  Well, federal laws restrict many types of qualified retirement plans from paying benefits to anyone other than the participant, unless a QDRO directs otherwise.

Assets that are split using a QDRO are exempt from the 10% penalty for early withdrawal of funds prior to the age of 59½. It’s important to understand that while the QDRO is being finalized, the retirement account may be frozen, meaning that during this time, loans, withdrawals or distributions will not be allowed.

Division of assets in IRAs

When dealing with non-qualified accounts, such as IRAs, the question that often comes up: is a QDRO really needed? These types of accounts do not customarily require a QDRO to divide assets in a divorce. With these accounts, a court order is often enough to spell out how these assets are divided.

However, it is important to understand that IRAs have special rules that affect how they’re taxed when distributed. IRAs split as part of a court order, known as a “transfer incident to divorce,” typically do not incur taxes or penalties. This process allows for the division of assets without the same tax and penalty exemptions as QDROs.

So, while QDRO is not strictly necessary to divide IRAs and other types of retirement accounts in a divorce, you have tread carefully and get the appropriate legal and tax advice.

Having a plan in place

In the event of a divorce, it’s important to be prepared to manage the changes that come with this transition. Here is a list of steps that can help guide you towards maintaining stability and achieving self-reliance during this time.

1. Know your rights

Educate yourself about your rights and how they may be affected by divorce. Understanding the laws and regulations can help you navigate the process more effectively.

2. Consult a divorce lawyer

A qualified divorce lawyer can provide invaluable guidance and representation throughout the divorce process. They can help you understand your options and advocate for your best interests. Turning to a divorce lawyer well-versed in the division of retirement assets is your best bet to getting an equitable financial settlement.

3. Gather documentation

Gather documentation related to the retirement assets to be divided, including statements, plan documents and beneficiary information. Having this information readily available can expedite the division process and ensure an accurate valuation of the benefits.

4. Consider mediation

Mediation can be an effective alternative to traditional divorce litigation, allowing you and your former spouse to work together to reach a mutually acceptable agreement regarding the division of assets such as marital property and retirement plans.

5. Review your settlement agreement

Before finalizing your divorce, carefully review the settlement agreement to ensure that all aspects of the division of retirement plans are clearly outlined and legally enforceable.

Managing retirement accounts after a divorce

After the dust settles on a divorce and the retirement plan assets are divided, it is a good idea for both parties to review and update their beneficiary designations. As the family dynamics have changed, the intended beneficiaries of the accounts in the event of death, of either party, may also change.

At Mutual of Omaha, we can help you protect what matters most with timely assistance and the advice of financial professionals to manage your finances.

FAQs on retirement plans in divorce

Q1: Can I receive my share of retirement benefits before my ex-spouse retires?

It depends on the type of retirement plan and the specific terms of the plan. Be sure to let your attorney know when you may need funds from the retirement accounts so they can plan accordingly.

Q2: How is the value of retirement plans determined?

Depending on the plan type, this can be a complicated exercise.  Some plans, like 401(k)s, have a monetary value that is fairly easy to determine and divide.  On the other hand, the valuation of pension benefits is based on many factors and may not be straightforward.  In addition to the lawyers, often an actuary, CPA or financial planner may get involved to help determine the plan’s value.

Q3: Who prepares a QDRO?

The various types of retirement plans all have unique features, calculations and requirements.  Additionally, the rules governing QDROs can be quite complicated.  As a result, it is always recommended to work with a lawyer with both QDRO and retirement plan experience.

Q4: Is a QDRO always needed to split retirement plan assets?

As we saw earlier, plans not covered under ERISA do not necessarily require a QDRO. Additionally, the spouses may be able to enter into some agreement where one spouse agrees to buy out the other spouse with funds outside of the retirement plan.  In this situation, the spouse who owns the retirement plan keeps it and pays the other spouse the value of their interest in the plan.  This is often referred to as a present-day valuation buy-out.

Q5: Can I modify a QDRO after it’s been approved by the court?

Once a QDRO has been approved by the court and the pension plan administrator, it can be quite tricky to modify. It’s therefore imperative to carefully review the QDRO before it’s finalized to ensure that it accurately reflects the terms of the divorce settlement.

Q6: What happens to if I remarry after divorce?

Typically, remarrying will not affect profit-sharing plans and IRAs. However, pension plan distributions, as part of a QDRO, may be affected by re-marriage. It’s prudent to consult with a divorce lawyer to understand how remarriage may affect your pension rights and any existing divorce agreements.

Q7: Can my spouse claim a share of my retirement plan if we were only married for a short time?

In many cases, yes. The length of the marriage is just one factor considered when dividing retirement assets in a divorce. Other factors, such as contributions made to the plan during the marriage, may also influence the division of assets and benefits. Specific state laws also are a factor.

Q8: Do states have different laws regarding the splitting of retirement assets?

Yes, states have different laws when it comes to the treatment of property acquired prior to and during marriage. In common-law states, the courts may look at each spouse’s individual financial situation, ability to earn an income, the length of the marriage, etc. when deciding how to divide assets. In community-property states, assets acquired during the marriage are considered jointly owned by both spouses, regardless of who acquired them. In these states each spouse would likely be entitled to half of the assets or benefits held in the plan.

Q9: Can I protect my retirement accounts from being divided in a divorce?

Depending on the laws in your jurisdiction, there may be steps you can take to protect your retirement and pension assets, such as entering into a prenuptial or postnuptial agreement. However, it’s essential to consult with a legal expert to understand your options.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.