You spend decades building a dependable retirement nest egg, and if you're facing a divorce there are likely numerous questions and concerns you have about protecting those accounts. Your retirement savings represents a significant investment in your future. The prospect of divorce can suddenly create an environment where it can feel like more than your money is at risk, but your future retirement as well.
Knowing what to expect, how these accounts may be handled as part of property separation, and how to defend against an unnecessary tax burden is step one.
For many divorcees, their savings, 401Ks, IRAs and other retirement or employee benefit plans can be one of, if not the, single largest asset they own, and like any other marital property, these accounts are subject to rules of property and asset division in the State of Colorado. Handling the proper division of these accounts in a complete and fair way can be complicated, particularly in cases involving professionals who may have more significant and diverse holdings.
If you are working through a divorce, then your attorney is the best person to speak to about the specifics of your case and how to protect your savings. However, those conversations can be improved by educating yourself on some of the important terminology and considerations that your attorney is likely to discuss with you.
With that in mind, here are three things to be thinking about in preparation for conversations about division of retirement accounts during your divorce.
Retirement plans can be divided like other marital property
The first thing to understand is that retirement accounts and pension savings are consider marital property that can be divided between the divorcing couple like any other income or assets. These divisions can be a complex process along with numerous considerations that need to be negotiated as part of the division, rollover or pay-out of these retirement accounts.
Additionally, getting plan-holders to comply and execute the negotiated agreement often requires specific court orders, and even then not all plans are handled the same way.
This process can take time to navigate properly, even for holders of only one or two employee retirement benefit accounts, and for professionals with multiple and varying types of plans the complexity only increases.
However, complexity doesn't mean it's not possible to navigate these issues, only that it requires time, attention to detail and careful review by qualified professionals. Clients, whose minds are on questions about child support and how their immediate liquid and physical assets might be divided, aren't always thinking about retirement accounts that have been quietly gaining in value for decades, but the reality is that time spent to make sure those plans are divided fairly while being protected from unanticipated taxes and fees could be the difference between retiring at 65 or not.
Different retirement plans may have different rules
When considering how retirement accounts may be divided during a divorce, it's important to recognize that not all accounts are the same. There are numerous things that can and will influence how any agreement is set up for any given retirement funds, and different accounts may need to be individually addressed.
Issues that can influence how a retirement account is divided include:
• Numerous tax issues including whether taxes will be assessed on transitioning the account to an alternate payee
• Rules that cover how and whether an account can be covered by a Qualified Domestic Relations Order
• Whether the primary beneficiary had already begun paying into the account prior to the marriage
• Any rules established in a prenuptial agreement
• How the courts choose to apply rules regarding equitable distribution
• Whether the retirement account is covered by the Employee Retirement Income Security Act (ERISA)
Additionally, how a given account is paid out may also depend on tax considerations, the rules governing the account and the natural course of negotiations throughout the divorce proceedings. In many cases, a portion of an eligible account will be assigned to an alternate payee, often under the rulings laid out by a qualified domestic relations order or QDRO.
Understanding Qualified Domestic Relations Orders (QDROs) in divorce
A QDRO is part of a divorce or separation agreement that lays out how retirement accounts are to be divided. This separate document is important, because it provides guidelines for the account administrators (specifically the banks and institutions holding the retirement accounts) to divide the property between primary and alternate payees. Simply speaking, it's a special set of rules the court uses to tell account administrators who gets what money.
These are important documents not only for their guidance, but because without these orders there may be additional and unexpected tax consequences for paying out an account. When a QDRO is issued, it is usually for retirement accounts protected under the Employee Retirement Income Security Act (ERISA).
However, not all retirement accounts and pensions are covered by ERISA, and in particular most military and government pensions follow different rules and may not be eligible for a QDRO. This does not mean those plans cannot be divided, but that the tax implications and payout agreements may need to be handled separately.
A QDRO cannot provide additional or increased benefits that are not part of the existing plan. The order is strictly designed to provide guidelines on payout and rollover of benefits provided by the retirement plan.
Finally, not all divorce or separation agreements include a QDRO and not all QDROs are delivered as part of a divorce. A QDRO is a general term and may refer to a court required transfer of retirement account funds to children or other dependents.
Navigating complex financial issues during a divorce
If you haven't already spoken to an attorney about how your financial accounts may be divided as part of a divorce agreement, it's important to do so before taking serious action. And, if you're already working with an attorney, it's important to understand how different pensions and accounts may be divided.
Clients facing divorce proceedings that include large or multiple retirement accounts may want to work with an attorney experienced with complex or high-asset cases.