When dividing retirement assets during divorce, there are some pitfalls divorcing spouses can fall into so it is helpful to be familiar with what they are. Child custody, child support and other concerns can already be challenging for divorcing couples who must still contend with property division concerns and dividing all their property, including retirement accounts.
Retirement accounts can represent a significant amount of a couple’s assets. Without a thorough understanding of how to divide retirement assets, divorcing couples can fall prey to penalties, unanticipated tax consequences. In addition, without understanding assets and needs, divorcing couples may not properly prioritize their property division priorities which should help guide the process.
While dividing assets rank high on the list of sources of stress during divorce, division of 401(k) funds is one of the most common areas of contention for divorcing couples according to a study from the American Academy of Matrimonial Lawyers from 2016. The top three concerns divorcing couples fight over include retirement accounts and pensions, alimony and business interests.
The method of dividing a workplace retirement plan is through a qualified domestic relations order (QDRO) This is true of a 401(k) or pension plan. A QDRO is separate from the divorce agreement so it is important the two are consistent and if the 401(k) is rolled over into an IRA the QDRO needs to state that. The QDRO should state the percentage interests for the split and it is important not to change beneficiary information until following the divorce. On the other hand, division of an IRA needs to be spelled out in the divorce agreement.
Because property division can be both complex and emotionally challenging, trained guidance throughout the process can provide important peace of mind. When couples understand the divorce process, it can lead to a smoother property division process.