There will never be a time in life that you get more financial advice than when you begin divorce proceedings. You will hear a lot of advice about getting the house or the most money from the house.
The house is probably the biggest investment the two of you ever made. It belongs to both of you, no matter what anyone says. You can decide together who stays in the house. You can sell the house, pay it off, and split the profit. Or, one of you can pay the other for an agreed-upon amount to essentially, purchase their part of the property and profit. You can do all of this on your own and no one else has a say in your decision.
Your greatest and most complicated asset
You may be surprised to find out that your home often is not your most significant asset. If you have been married for a while, or one (or both) of you have had a job for a long time that pays into your 401K, it is probably a substantial amount of money. This money is part of the marital assets. In other words, it belongs to both of you. But, it is not just the two of you when it comes to this asset. The 401k plan must have an administrator and he or she is immediately involved.
● Your divorce decree must order the division of money.
This is a necessary and expected addition to your divorce papers. The Employee Retirement Income Security Act (known as ERISA) was passed into law in 1974. It does not matter which spouse has the retirement account, their partner is entitled to their share. It is very important to understand that your divorce decree, no matter where it stands in the process, does not give you your share of the retirement money.
● Your attorney must draw up a legal document called the Qualified Domestic Relations Order (QDRO)
This legal document must be signed by the family court judge. It is then given to the 401k plan administrator. The document tells the administrator how to divide and disperse the money. The QDRO establishes the spouse as an alternate payee.
Your spouse has three options on how to receive their money. The QDRO specifies which method they chose. The options are:
- Roll the money over into their own retirement plan
- Leave the money in the account and take their share when you take yours
- Take a cash payment (less any taxes, penalties, and fees).
- If either of the spouses decides to take their portion of the money at the time of divorce, there is no 10% early withdrawal fee. This is a one-time exception. After that opportunity has passed, unless the spouse is 59 ½ years of age, they will pay the 10% penalty.
Regardless of the age of the spouses, the government will count the money as income and income taxes must be paid to the IRS.
Division of retirement funds is the second most fought-over part of divorces. In fact, 83% of divorces go into battle over alimony, 62% fight over retirement money, and 60% fight over business interests. When you think of all the things that people have trouble with such as homes, automobiles, pets, child support, visitation, and expensive belongings it is hard to imagine 20% of divorcing couples are more concerned with their 401K than their time and housing for their children. After 2018, spouses who are ordered to pay alimony can no longer claim it as a tax deduction. So, these numbers may change.
What you should know
You can use your divorce attorney to draw up your separate legal documents regarding retirement money, but you do not have to. This is a tricky subject and there is no wiggle room. Ask him if he is experienced in the preparation of the QDRO. You want and need an expert in this field. If he is not qualified, hire a separate attorney.
Not a one-stop-shop
In many families, there is more than one retirement account. There could be retirement accounts from past jobs, from government jobs or military service. You may have one for each spouse. Each one of these accounts needs its own QDRO. Each of them will have their own administrator (which will have to approve them.)
In the last three decades, the divorce rate for women over 50-years-old doubled. It has held at one in every four divorces. When a person is over 50, their net worth is significantly impacted by the amount of savings, property, and investments they possess. The divisions of the 401K are difficult and the laws require an expert.
Do not change the beneficiary until the funds are dispersed
You know you are getting the divorce and you have come to an agreement on the retirement monies, so you go ahead and remove your spouse’s name as the beneficiary. If your ex is killed in an accident, before the paperwork and process are complete in this separate issue, you are no longer entitled to the money. If he changed the beneficiary to his mother, she gets the money. Do not change it until then. In most cases, your spouse cannot make changes without your signature.
State a percentage, not a dollar amount
Let’s say, the retirement account had $200,000 in it when you began the divorce process. You agreed to split it down the middle. Your paperwork is drawn up and signed by the family court judge and approved by the plan administrator. This is a long process. If during that time, the market changed and your plan grew by $50,000, you are expecting $125,000. If your paperwork reads that each of you will get 50% of the money, that is what you will get. But, if your paperwork reads that you will get $100,000 which is what half was in the beginning, you will get $100,000 and your spouse will get $150,000. It is all in the wording.
Of course the same is true if the plan took a dip. If the plan loses $50,000 and your paperwork reads that you will get $100,000 instead of 50%, you will get your $100,000 and your spouse gets hit with the loss and only gets $50,000. It is just luck. It is better to be safe than sorry.
Divorce is hard enough. Emotions run high. Learn what you need to know well before you need to know it. Don’t make the mistake of walking away and letting your spouse have it all. The money is set aside for the future. Yours and theirs. So, do the work and maintain your security.
You cannot learn everything you need to know from the internet or from your neighbor who got a divorce a few years ago. Just as your marriage is unlike anyone else’s, your divorce must be written for your marriage. Your attorney will gather the correct information from you to know how to get you what you need and to protect you. Call a qualified attorney, and keep your details to yourself until then.