When dividing assets and debts in a divorce, there will usually be retirement accounts to consider. Here are 18 common divorce retirement account mistakes:
- Not realizing that different types of retirement accounts are subject to different rules.
- Failing to consider that some accounts may be the separate property of one spouse; some may be community property of both spouses and some may be a mixture of the two, at least according to the law.
- Not understanding that dividing workplace plans like 401(k)s and pensions requires a special court order (called a QDRO) separate from the divorce agreement and the other required divorce-court paperwork.
- Dividing more accounts than necessary. For each account that is divided (other than IRAs), a QDRO will be necessary. And QDROs cost extra.
- For accounts that will be divided or for which there is some risk that funds will be improperly withdrawn, not obtaining a “joinder” which formally brings the account into the divorce.
IRAs, 401(k)s and similar workplace “defined contribution” accounts
- Failing to find out about or deal with existing loans against an account. Most retirement plans cannot award any portion of a loan balance through a QDRO. So responsibility for paying off the loan must be made clear.
- Not specifying either a clear date of division (e.g. Spouse A gets one-half of the account balance on xx/xx/xx) or a clear amount to be awarded (e.g. $50k to Spouse A) that is not tied to a specific date.
- Failing to consider who will bear the risk/reward of account value fluctuations between now and the date the division actually occurs.
- Not understanding the tax implications of getting cash out, strategies to minimize taxes and penalties for early withdrawal.
- Not obtaining a present value analysis. Without one, you can’t really compare the value of a pension to the value of other assets.
- Failing to specify a clear cut-off date, after which the former spouse isn’t entitled to benefit accruals based on the employee spouse’s continued work for the employer.
- Pensions can usually be split in two ways: “shared interest” and “separate interest.” Each has pros and cons. Without understanding this, the non-employee spouse may not make the best choice.
- When there is a “shared interest” division, not understanding and addressing what happens if the employee spouse dies.
- Not getting the QDRO process completed as soon as possible to coincide with the divorce.
- Not understanding the extra divorce costs associated with each QDRO and clarifying who will pay them.
- Failing to assign responsibility for overseeing the many steps of the QDRO process to either spouse and stopping before it is complete.
- Not obtaining some form of certification from the account “Plan Administrator” that the final QDRO has been received and accepted.
- Not ensuring the QDRO drafter has expertise in doing so. This is especially important for QDROs that divide pensions and even more so for those that do not establish a “separate interest” for the non-employee spouse.