When it comes to things that spouses have disputes about in a divorce, it might surprise you to know that the top three are alimony, retirement accounts and business interests. Alimony ranks 83 percent, retirement accounts 62 percent and business interests 60 percent.
If you are in the process of a divorce and you or your spouse have 401(k)s or retirement accounts, making sure no mistakes are made in splitting these accounts is very important. While the way they are divided must be included in your divorce papers, you must also have a separate agreement that you will want drafted by an attorney who has experience in this area.
Who you have draft it can be the same person as your divorce attorney or a separate attorney; however, your divorce attorney will still need to review it to make sure it is what was discussed. It also must meet the requirements in the divorce agreement.
The document that is needed for either a 401(k) plan or traditional pension plan is called a qualified domestic relations order (QDRO). The attorney drafting the QDRO will coordinate with the administrator of the plan to meet their requirements for division of the account.
The 401(k), IRA or pension plan can be transferred in a trustee-to-trustee fashion, where the portion taken out goes into a rollover IRA. It will not be taxable if it is rolled over. However, because of the financial burden placed on some recipients in a divorce, this is one of the few exceptions where a 401(k) or retirement fund can release funds directly to an individual before age 59 1/2 without penalties; however, it must be specified in the QDRO that the funds will be distributed in this way. The funds may be taxable to the recipient.
There are some common mistakes people make when dividing retirement plans. One is allowing a beneficiary change to take place before the divorce is final. If the owner of a plan dies before the divorce is finalized, this could leave the other spouse with no rights to any of the funds.
Also, do not specify an amount in the QDRO, but a percentage. Gains or losses on a 401(k) could change before the process is complete. What was planned to be an equal distribution could quickly become less for one spouse and more for the other.
Source: cnbc, "How to avoid mistakes dividing up 401(k) assets in divorce," Sarah O'Brien, March 07, 2018