What must divorcing spouses consider when dividing retirement accounts?

When dividing retirement accounts, spouses should assess their need for liquidity, tax issues, the need for a QDRO and the enforceability of the division.

During divorce, many people in Sugar Land feel highly concerned about securing a favorable division of certain marital assets, such as the family home. For many spouses, the distribution of retirement accounts may not inspire as much worry or conflict. Still, given the substantial value that these assets often possess, it is critical for spouses to secure a reasonable division by keeping the following important factors in mind.

Tax implications

Spouses should always take time to assess any tax liability that may reduce the real worth of a marital asset, according to The Wall Street Journal. For instance, when comparing a tax-deferred retirement account and an account that was funded post-tax, spouses should be aware that the real worth of the tax deferred account will fall significantly after taxes are removed. Spouses should be careful to avoid accepting a settlement that appears balanced but leaves one person with significantly lower retirement savings.

Necessity of a QDRO

Certain retirement accounts, including pension plans and 401(k) plans, can only be divided with a Qualified Domestic Relations Order (QDRO). According to Forbes, this legal order tells the plan administrator how benefits must be paid to the non-employee spouse. Typically, an administrator cannot disburse these benefits based on a divorce decree alone. This makes it critical for spouses to obtain a QDRO to enforce the terms of the divorce decree.

Liquidity issues

When dividing retirement accounts, spouses should consider how much liquidity they require and avoid making assumptions about the availability of retirement funds. As an example, Forbes cites the hypothetical case of a divorce decree ordering that a spouse receive an immediate lump sum payment from the other spouse's pension plan. Many plans will not pay such a sum, which could leave the non-employee spouse without needed and anticipated income.

Spouses should ensure that the overall division of assets leaves them with enough liquidity to handle their immediate post-divorce expenses. At the same time, spouses should be careful not to give up too much of their share of retirement benefits. As USA Today notes, compared to a joint retirement, an individual retirement may cost 30 to 50 percent more on a per-person basis. Making up this additional cost may be especially difficult for spouses who relinquish a large amount of their retirement benefits in favor of more liquid assets.

Legal enforceability

As the hypothetical example from Forbes shows, a retirement plan administrator may reject a QDRO on various grounds. Furthermore, in Texas, spouses may not revise the terms of marital property division that were outlined in a divorce decree after a divorce is finalized. Therefore, Forbes recommends that spouses submit a completed version of the QDRO to the administrator before the divorce is over. This allows time for any necessary revisions in the event that the plan is rejected.

Protecting retirement assets

Given the complexity of dividing retirement benefits, divorcing spouses should strongly consider engaging bwalters@bwaconsultants.com an attorney who has experience in this area of law. An attorney may be able to help a spouse avoid common missteps and work toward an appropriate division of these important assets.