Retirement might be the last thing on your mind as you navigate the murky waters of divorce, but it’s certainly something that divorcing couples need to consider during and after the split. Your financial future and retirement savings can be profoundly impacted by a divorce and, depending on the particulars of your situation, you could find yourself dividing retirement assets.
How can you keep your divorce from ruining your retirement? Foundation Divorce Solutions has put together a quick list of helpful tips to better safeguard your retirement accounts from tax penalties and other pitfalls.
Consider working with a lawyer or mediator
A mediator or lawyer can help guide you through the financial nuances of dividing assets in a divorce. They can also serve as a neutral party in divorce negotiations, helping to smooth over the agreement process along the road to an official divorce decree.
These professionals bring with them expertise in negotiating the intricacies of divorce and the division of marital property, which can help speed up things up. Many divorces are settled without going to court and, depending on your circumstances, you may want to consider whether settling your divorce outside of the court system may be in your best interest.
Retirement account and tax considerations
It’s very true that not all retirement accounts were created equally—and indeed, each comes with its own unique tax considerations and varying governing rules. Comparing funds in a 401(k) and a Roth IRA account are not apples-to-apples. It is crucial to comb the particulars of each retirement account to determine the true value of your assets.
Here’s a good example: funds in a standard brokerage account are subject to capital gains taxes while retirement money put away in a traditional savings account isn’t. A 401(k) with $40,000 in it is worth less than a Roth IRA with $40,000 in it because the funds in a Roth IRA are tax-free (if withdrawn after 59 and a half) while any monies in a 401(k) are subject to tax.
Obtaining a qualified domestic relations order (QDRO)
Any funds deposited into 401(k), 403(b), and Thrift Savings Plans—for military personnel and federal workers—are protected under the Employee Retirement Income Security Act of 1974. To divide the assets in these plans legally and without tax or early withdrawal penalties, you will need to draft and legally certify a qualified domestic relations order (QDRO).
A QDRO signed by a judge provides for the legal splitting of the accounts mentioned above and retirement plan administrators are bound by law to execute it. The QDRO will allow you to roll over a part of your qualified plan tax-free and without incurring penalties for moving the money early. A financial expert can help you better decide the best way to move forward with your retirement accounts post-divorce—you may decide to continue contributing to your plan or trustee transfer it into a Roth IRA.
Who’s entitled to my pension?
Whether or not your pension will be divided really depends on state-specific laws. For example, Washington state is a community property state, so assets are divided 50/50. You may be entitled to part of your ex’s pension—or vice versa—but generally, any funds that were accumulated in your pension before you got married are considered individual assets.
Communal property states divide all marital assets equally while judges in equitable distribution states divide marital property based on what a judge deems equitable Because pensions are usually large assets, they are usually considered when splitting up assets. Remember, you or your spouse can negotiate the particulars during the settlement process and can trade assets against each other to keep your pension intact.
Protect yours with signed agreements
If you consider your divorce amicable, great, count yourself among the lucky folks able to compartmentalize things and move past any emotional hang-ups. But no matter how civil things are between you and your ex-beau, it’s imperative to make sure any agreements made are legally drawn up and signed by both parties. Why? Because a legal contract means you are bound by law.
While it might seem trivial, it’s prudent to avoid procrastinating removing your ex’s name from any shared accounts. If your ex is still listed on your accounts, they can still borrow against or withdraw funds from those accounts.
Don’t let divorce blindside your retirement, working with a mediator or lawyer can help bring an added layer of financial expertise and better set you up for post-divorce financial success. An accurate assessment of your retirement funds both during and after your divorce will help you move forward and take sole ownership of your assets with sound financial footing. For more information about mediation in Washington state and the greater Seattle area, visit Foundation Divorce Solutions.