Divorce is certainly an emotional experience and often a heartbreaking decision for spouses to make. Depending on your age, you might be more focused on other aspects of your divorce, especially if you have children, but it is important not to forget about protecting your retirement. Even if retiring is still far off on the horizon, mistakes made now can impact your ability to retire at a reasonable age in the future.
To protect your retirement during your divorce, consider keeping some of these important steps in mind as you move forward:
- Become familiar with a QDRO: A Qualified Domestic Relations Order, otherwise known as a QDRO, is a document used by the courts to effectively divide qualified retirement plans, including pensions and 401(k) plans. Make sure it becomes part of your vocabulary early on because you need to know what will be permitted in the split of your plans before you can begin to calculate other assets that are also intended for division. Obtaining approval for a QDRO is a complicated process, so do not put off this important step.
- Ensure the QDRO is approved by the retirement plan: A mistake often made with QDROs is that they are sometimes unclear or delayed. Make sure that the division of your assets is in alignment with your plan's rules by contacting the plan administrator early on in the divorce process. Assets like pensions might have to be recalculated based on the receiving spouse’s life expectancy, which can take months and create problems if a spouse is counting on a cash payout to live on.
- Learn about the options your retirement plan allows: Not all retirement plans are the same even though they are all governed by federal law. When it comes to dividing these assets, there are important differences in how they are allowed to be divided. Some might even be slow to cooperate with your needs.
- Learn about the value of your plan after taxes: If a divorcee is in the 25% tax bracket, his or her $100,000 in 401(k) funds is actually worth $75,000. Therefore, you should be wary of making the mistake of trading an IRA or 401(k) plan for a smaller taxable account or personal items. Initially, it might seem like someone is getting the better end of the deal, but once taxes are taken into account, this might not be true.
- Roth plans have more value: Keep in mind that Roth IRA or Roth 401(k) plans are more valuable than traditional ones since the taxes were paid when the contributions were made. This means that qualified distributions are tax-free, so if you are the spouse in a higher tax bracket and have this type of account, consider offering something else in return for keeping your Roth IRA or Roth 401(k).
- Consider proposing a complete split of a defined plan: What will this mean? You and your spouse will each take half of the assets and establish your own respective accounts of which you are in control of. Otherwise, the spouse who owns the retirement plan benefit will be the one making decisions on when benefits will commence for both parties. To avoid being linked to an ex-spouse who might want to work a decade longer than you do, consider this option.
- Change beneficiaries: While the divorce will nullify any outstanding wills, you should not neglect to change the beneficiaries of your retirement plans. If your former spouse remains in your plan as a designated beneficiary, he or she will receive the benefit regardless of what a new will or state law outlines.
- Use a financial planner: Financial planners can partner with your attorney and consult on technical aspects of different account types. He or she can also help you become hyperconscious of liquidity issues and encourage you to take proactive actions, such as beginning early conversations with your retirement plan sponsor.
Family Law Attorney in McKinney
If you have decided to move forward with a divorce, you will need skilled legal assistance to ensure all legal matters, such as the division of property and assets, are handled appropriately. At Camille Borg Law PLLC, our McKinney firm delivers knowledgeable legal advice in a compassionate manner while vigorously protecting the rights and interests of our clients. You deserve an ally during this difficult time, so do not hesitate to reach out to us.
Call our office today at (469) 646-7763 to schedule a consultation.