How to Divide Retirement Assets in a Divorce
An explanation of Qualified Accounts and why they matter to you.
When it comes to dividing assets in a divorce, retirement assets can always be a little tricky. This is because of a few reasons.
First, retirement assets tend to be the largest accounts a family has. Their size and importance to the family's financial health are reason enough to make them a contentious issue. In some cases, retirement plans are the only longterm assets a family owns.
Second, retirement assets are traditionally very illiquid (meaning you can't access them immediately). This key attribute makes their transfer and eventual use difficult. Retirement assets must be looked at both for the immediate value, as well as their long-term potential. As another part of this, retirement accounts can be difficult to divide. While a checking account can be easily split in two in a matter of minutes, some retirement accounts (see Qualified Accounts below) require legal order and attorneys.
And third, retirement assets can have a more personal feel that joint accounts. For example, a wife may have a 401k that she first started before marriage. Or, a husband may have an IRA that he contributes with only his salary. So even though these may be viewed as "family accounts", they sometimes carry longterm significance to a particular spouse.
Because of the above (and numerous other issues), retirement accounts can be difficult, confusing, and contentious to divide. Further, not all retirement accounts are created equal. Different types of accounts need to be divided in different manners in order to avoid potentially large fees.
What is a Qualified Retirement Account?
Qualified retirement accounts / plans allow investment income to accumulate tax-deferred according to the Employee Retirement Income Security Act (ERISA) guidelines. Most accounts that are created by employers are also considered qualified. For example, 401(k), 403(b), pensions, and profit-sharing plans are qualified. Taxes on earnings from these contributions are deferred until the employee withdraws from the plan.
Non-qualified plans fall outside of the ERISA guidelines that govern Qualified plans. Contributions to these types of plan are usually nondeductible to the employer and taxable to the employee. An example of a popular non-qualified plan is a Roth IRA.
The reason we make the distinction between Qualified and Non-Qualified plans is that their division is significantly different.
Dividing Qualified and Non-Qualified Retirement Plans
Because of the tax advantages associated with Qualified plans, the government does not simply let you divide the assets and go on your way (like you can do with Non-Qualified plans). You actual need a legal order, called a Qualified Retirement Domestic Order (QRDO).
A QRDO is a court order that requires a portion (or all) of a retirement plan to be assigned or paid to another person
The reason this is important is that QRDOs cost money to attain. You will need an attorney to take you through the process and help you move the assets, which can cost $1,500 on average. Therefore if you are not receiving an equal portion of a Qualified plan, make sure you are not paying an equal portion of the fee. At Lauren Smith Legal Services, we make sure this is planned and handled well-before it comes time to divide the account.
Retirement accounts are always tricky to divide and cause a lot of headaches in a mediation or trial.
Make sure and know if the account you are dividing is Qualified or Non-Qualified. This can have substantial costs associated with it.
At Lauren Smith Legal Services, we build in these costs through the division of the assets. This creates balance and a sense of trust in the process.
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