The Most Essential Factor when Dividing Retirement in Divorce (& Four Traps if You are not Knowledgeable)

In many divorce cases, retirement accounts are the greatest, or at least one of the greatest assets. For this reason, it is imperative to understand the options for transferring and sharing retirement assets in a way that maximizes benefits and minimizes taxes.

Informed consent is the most important thing in dividing divorced retirement

You don’t want to make significant financial decisions about your future without understanding the financial ramifications. Retirement accounts are complicated, vary greatly in their requirements and planning details, and can lead to significant tax liability. If you do not feel fully informed when agreeing to split one or more retirement accounts, you are running a financial risk that is most likely irreversible once your divorce is over. To avoid making uninformed or bad decisions, reach out to the retirement and financial experts for information and advice before making those decisions (see below for the author’s flat-rate options to get this type of advice).

Here are just four ways a lack of information when splitting retirement accounts can be costly in the event of a divorce:

1. Defined contribution plans are different from defined benefit plans – Treating a retirement statement the same as a 401 (k) statement can leave you with a lot of money on the table in your divorce. Pensions are usually paid for the life of an employee and can usually be extended for the life of a spouse or a former spouse. This means that the value is not easy to calculate and is often underestimated.

2. Market changes can be significant – the values ​​of the retirement account change due to investment changes in addition to contributions or withdrawals. A divorce settlement or divorce decree sets the split date (after which contributions and withdrawals are no longer split), but market changes are often ignored. This can be a real problem if it takes months (or even years) to complete the money transfer. If you do not determine that market changes are included, you run the risk of losing any investment gains in the period between the split date and the actual transfer date.

3. Selection of offset v. Diversification Can Have Unintended Consequences – Similar to issues that arise due to market changes between the split date and the transfer date, different accounts are created differently and change differently between the split date and the transfer date. If you agree to clearing multiple accounts and only separating one account, you may save QDRO preparation fees, but you risk that the one account used for clearing is more or less affordable for an investment than the others.

4. Failure to provide survivor benefits can be costly – some retirement accounts cannot be split until retirement age. If you do not provide survivor benefits for the ex-spouse on these accounts, the ex-spouse may not receive anything. State and private pensions differ significantly in terms of the types of survivor benefits available and the restrictions on those benefits. If you didn’t address survivor benefits in your agreement, you might have agreed to split a pension and receive nothing if your ex-spouse dies.

How to be informed: The divorce retirement department (usually via QDRO or DRO) is complicated and can often lead to ongoing conflict after the divorce process is supposed to be over. To avoid prolonging this part of your divorce, Skylark Law & Mediation, PC offers the following service:

Retirement Mediation Session (1-hour session for $ 400) – Justin Kelsey prepares QDROs and DROs for Gray Jay Endeavours, LLC and is an experienced mediator. When Justin sums up these skills, he can join your case (whether you are in mediation, negotiation, or litigation) for a one-time retirement information and mediation session that will help you plan retirement the first time To do it right! Plan here