When you hear of a divorce in the works, your first thought might be that it is a young couple. However, many middle-aged and older couples decide to end their marriages. In terms of assets, an ex-spouse may be entitled to a portion of the funds from the other party's retirement account. Consequently, the disposition of retirement plans may be a major consideration in the divorce settlement.
Adhering to retirement account guidelines
If you are contemplating divorce, you are probably wondering how the plans you and your spouse had for retirement are going to be handled. The contributions you made to a 401K were deducted from your salary, for example. The court must follow federal guidelines with respect to the division of your 401K, 403b and similar plans. However, the division of IRAs will be made according to state laws. Your divorce settlement agreement should spell these differences out clearly.
Understanding the QDRO
A Qualified Domestic Relations Order, or QDRO, is used to divide the assets of a qualified plan such as a 403(b). It must be filed with the plan administrator and allow for the disbursement of payments to someone other than the plan participant. The funds can be used for purposes such as alimony payments or child support. QDRO documents must be properly prepared so that they comply with plan specifications. To avoid the possibility of non-payment of funds, they must also be filed in a timely manner. According to the Internal Revenue Service, the person who receives QDRO benefits must report them as if he or she is a plan participant.
Dividing an IRA
An IRA may be divided as part of the divorce settlement. The assets are usually transferred through a custodian, such as the brokerage firm that manages the account. If you have an IRA, it is recommended that you contact the financial institution concerning transfer requirements. This way you can be assured that the required language is used in the divorce decree. Be aware that any monies received from the transfer of an IRA will be taxed as income.
Coming to terms with retirement accounts
When it comes to divorce, assets from retirement accounts can be handled in various ways. In issuing a QDRO, the court can award all or part of the funds from a retirement account to a former spouse, child or some other dependent. A recipient may be able to roll over, tax-free, all or part of the distribution. On the other hand, a divorced participant may want to change the beneficiary of his or her retirement plan. In short, if your marriage is ending, you may have many questions and concerns about retirement plans, but an attorney experienced in divorce law can help you sort them all out.