Often times a retirement fund is the largest pot of money at stake within a divorce. Therefore, it probably goes without saying that it is also often a great source of contention. There are rules in place that determine how a retirement account can be distributed, and to whom.
When going through a divorce, the first thing any party should make sure of is that he or she is retaining an attorney who is knowledgeable in retirement fund disbursement procedures and qualified domestic relations orders (QDRO.) The QDRO is very important. It is a document separate from a divorce decree. Its purpose is to specifically set out how much each spouse receives from a fund in the future. It will be the order by which a retirement fund administrator will perform its disbursement. When these disbursements are not completed correctly, they can easily result in disastrous tax consequences for one party.
In general, there are two types of retirement accounts. A “defined contribution plan” is an account in which the employee, employer, or both make contributions. It may also be referred to as a savings plan. The most common type of defined contribution plan is a 401(k).
The second type of plan is known as a pension. It is based on an employee’s salary and years of service, and it will be paid by a company for the remainder of an employee’s life after retirement. Due to payments to take place in the future, it is a bit more difficult to define a present value for these types of plans. Expert advice is recommended.
A knowledgeable divorce attorney can help determine both present and future values of retirement accounts. Attempting to navigate these matters without expert advice can result in both undervaluation and severe tax consequences.
