If you are going through a divorce, or even considering initiating the process, you should be aware that the financial ramifications are likely to be significant, and the legal issues involved may be complicated. One area that will need to be addressed is how any pension plans or retirement accounts that you or your spouse are or will be entitled to will be divided.
Get professional advice regarding the division of retirement accounts and pension plans in divorce.
Some aspects of a divorce are easier to steer through than others. Many of the technical aspects of dividing retirement accounts and pension plans in divorce are not familiar to the general public, and many retirement and pension plans are complicated especially governmental and military plans. Court orders are usually required to divide IRAs, 401(k) s, and pension plans or other retirement accounts; the type of court order depends on the type of retirement being divided. The court order necessary may simply be your court approved divorce agreement that outlines the terms of the division, upon which the institution holding the retirement funds will rely; or a special court order signed by a judge that directs the plan administrator on how to divide the retirement accounts or pension plans may be necessary. However a special court order is necessary for most private retirement accounts such as 401(k) s and pension plans, and is called a Qualified Domestic Relations Order (QDRO); a similar special court order for state and governmental retirement and pension plans may just be referred to as a Domestic Relations Order (DRO). Your divorce attorney can advise you regarding the division of retirement accounts and pension plans and whether any special court orders will be necessary in your circumstance; if a special court order is necessary your attorney can refer you to the appropriate professional to prepare those documents.
The importance of dividing retirement accounts and pension plans properly is not just that each pension plan administrator has different rules that apply that need to be complied with when dividing those assets in divorce. There are also applicable tax laws. Division of retirement accounts or pension plans in divorce are generally non-taxable events to either the transferor or the recipient. However failure to comply with plan or IRS rules can result in serious tax consequences for one or both parties; this can be avoided by getting proper legal and other professional advise during your divorce.
Weigh your options carefully with your divorce attorney, and consult with pension and/or financial professionals as well where appropriate.
It is important to understand your options when considering the division of retirement accounts and pension plans, including date of division and the formula for division. For example, pension plans often include other components such as pre and post-retirement survivor benefits, and cost of living adjustments. Using a pension specialist can help the parties and their attorneys understand the retirement or pension benefits involved and how best to divide them. In addition, in situations in which the divorcing spouses are considering trading off the value of a taxable asset for the value of a potentially non-taxable asset (e.g. a retirement account for house equity), a financial tax advisor can be extremely helpful in providing additional guidance. It may seem like a lot of extra effort and there will be additional cost in using a pension specialist or financial professional, but keep in mind that getting all the details right is worth the time and trouble to make sure everything is handled correctly. Your case may not be that complicated, or require any additional experts; but you need to be sure you get educated about the division of retirement accounts and pension plans in divorce so that you can make an informed decision and understand all the ramifications even after divorce. Pension and retirement accounts are valuable assets that are important to protect and divide equitably in divorce.