Top Three Ways to Protect Your Retirement Assets in Divorce

During a divorce, retirement funds such as 401(k) accounts, IRAs and pensions are divisible between both parties. Divorce Planning of Austin assists clients to help them get the most from the retirement savings earned during the marriage.

1.     Each retirement account has a different requirement for legal division.  By engaging each plan’s administrator, we help our clients analyze their options for division and payout based on their retirement plans and financial goals.

While the division of marital property generally is governed by state domestic relations law, any assignments of retirement interests must also comply with Federal law, namely the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code).

Your retirement plan may require that your attorney draft a Qualified Domestic Relations Order (QDRO or “Quadro”) to divide the assets.  If so, a QDRO needs to be completed before the final decree is signed.  The QDRO outlines every detail of the split so the account administrator can complete the transaction accurately.

QDRO legal drafting may be specific to the plan.  You should consult an attorney or QDRO specialist before proceeding with the division of retirement benefits since the your plan’s required QDRO wording may be different from standard.

Other retirement plans such as traditional IRAs or Roth IRAs may only require a signature guarantee from the owner of the account and a copy of the divorce decree in order to divide the account.  Please consult your attorney or the plan administrator to determine what is required for division to take place.

Be aware that employees with 401ks may be able to borrow from them.  The loan may not be so obvious from the 401k statement, complicating the division of these accounts.  Divorce Planning of Austin can help you to analyze your alternatives.

2.     Each retirement account has different tax consequences for withdrawal and early withdrawal penalties.  Most retirement accounts have penalties for withdrawal before age 59.5. Employer sponsored plan’s like 401ks for example can be withdrawn by the alternate payee pursuant to divorce without early withdrawal penalties (10%) but ordinary income taxes will still need to be paid. For a spouse with little or no income in the first years of divorce, this can be a source of liquidity to support his or her lifestyle.  However, the tradeoff is less money for retirement.

3.     Retirement assets are only one part of a family’s total financial picture.  Divorce Planning of Austin ranks our clients assets in terms of liquidity and tax consequences to help match the division to the clients’ financial goals and priorities.  For example, the proceeds from the sale of a home (after the realtor is paid) generally is not taxed unless there is a very large gain on the sale.  And these proceeds are available to divorcing clients before age 59.5.  Thus home sale proceed nearly always rank high on the list of desirable assets for most of our clients.  Traditional IRAs, on the other hand, rank low because they cannot be withdrawn until age 59.5 and have an ordinary tax associated with withdrawal (and possible penalties if withdrawn after asset division). Brokerage and investment accounts generally rank in-between home sale proceeds and traditional IRAs because they are available for withdrawal and only taxed on the gains in the account.

Divorce Planning of Austin can help you analyze your financial needs as you transition away from married life.  We help you to project your cash flow for the years after your divorce, analyze your strategy for retirement saving and more. Talk to us. We can help.

Divorce Planning of Austin does not provide legal or tax advice. Please consult the appropriate professional regarding your specific circumstances.

Divorce Planning of Austin will work with your attorney and tax professional  to help you make better financial decisions during your divorce.