How to Divide Retirement Benefits After Divorce

Retirement benefits are a large portion of many Americans’ assets. For many, a 401(k) or IRA is the single largest asset to their name. This is especially true for workers who have had time to accumulate a large portfolio. However, even younger workers likely have thousands of dollars in a retirement account.

Complicating retirement benefits for many baby boomers is divorce. Older couples are increasingly divorcing; approximately one in four divorcing couples are over age 50. Unfortunately, dividing retirement benefits and pension plans in divorce can be very complex.

Retirement benefits that accumulate during the marriage are considered marital property. Marital property is property that belongs to both spouses in a marriage. For tax-deferred retirement accounts like 401(k) accounts, however, division is not so simple. Unlike checking accounts or the proceeds from the sale of a house, dividing the account in half would result in severe tax consequences.

A Qualified Domestic Relations Order

A qualified domestic relations order, more commonly known as a QDRO, is the appropriate vehicle to divide a 401(k) plan. A QDRO is not necessary for an IRA or pension plan, however. A QDRO is an order for a retirement plan that distributes a portion of the retirement plan to a spouse, former spouse or child. If the division is to a former spouse, he or she can “roll over” the payments into his or her own retirement plan, thus preserving the tax deferral benefits of the 401(k).

A QDRO should be completed before the divorce is finalized. Otherwise, financial and legal complications may crop up and leave an ex-spouse with little recourse. For example, the divorce decree may call for the immediate distribution of a part of a pension plan in order for one former spouse to make immediate, necessary payments. Some pension plans will not allow an immediate distribution, though, instead requiring monthly payments at retirement age. Understanding this before the divorce is final will allow the ex to obtain the necessary cash through other methods.

An Attorney Can Help

It can be easy to overlook retirement benefits and pension plans when dividing assets in divorce. Most people who are divorcing think first to the marital home, their possessions and checking and savings accounts when considering finances. However, retirement benefits can be the largest asset for a married couple, and dividing a retirement account appropriately can mean the difference between financial uncertainty and a comfortable living post-divorce.

Anyone considering divorce should contact a skilled divorce lawyer to discuss appropriate first steps.