Texas individuals and couples take the time to plan and prepare for the future. This often means having finances in order for retirement. While these steps are often necessary, divorcing couples often find their retirement assets up at the chopping block, limiting how much they have to spend during their retirement years post-divorce. Although this could plague any divorcing couple, those going through a high-asset divorce might face added difficulties.
How can you avoid mistakes dividing 401(k) assets in a divorce? It’s no surprise that the divorce process causes much stress and agony. Dividing any assets in the divorce process is challenging. Seeing a nest egg for retirement being divided is difficult on divorcing spouses. However, there are ways to ease this time and ensure mistakes are not made.
It is important is that spouses understand what is stake during the process of dividing 401(k)s. It is important to ensure that everything is addressed and nothing is missed. And because dividing 401(k) accounts tops the list of assets commonly fought over during divorce, it is vital to understand how this account is divvied up.
To begin, the only way to access a workplace retirement plan is through a qualified domestic relations order (QDRO). This document is separate from a divorce agreement. However, it is based on the content of the divorce decree. This document can help for the smooth transition of 401(k) funds post-divorce, whether it is completed immediately or in the future.
In cases where 401(k) funds are transferred to a rollover IRA, this needs to be spelled out in the QDRO. Doing so also ensures that this is not a taxable event. On the other hand, if an ex-spouse decided to receive this money directly rather than transferring it to a rollover IRA, the recipient will pay ordinary income taxes on this money.
Being well informed on specific steps of phases of the divorce process could help ease the stress and pressure of the entire process. Taking the time to gather and understand this information could assist divorcing spouses, helping them recover the assets owed to them during property division.
Source: CNBC, “How to avoid mistakes dividing up 401(k) assets in divorce,” Sarah, O’Brien, March 7, 2018