The issues that couples deal with in a divorce are often emotionally charged. While couples argue about the immediate issues – the house, child support, debts, etc. – they may overlook or underestimate the importance of retirement benefits. It’s important to know your rights to retirement benefits because these benefits are not automatically split in a divorce.
Whether you and your spouse are in agreement about the terms of the divorce or not, it may be a good idea to hire an attorney to protect your interests.
When Retirement Benefits are Marital Property
Divorce laws vary by state, but in most states the retirement benefits earned by either spouse during the marriage are considered “marital property” or “community property,” which means they can be divided in a divorce. The law generally applies to pension plans and employer-sponsored retirement plans such as 401(k)s and 403(b)s.
To have retirement benefits split in a divorce, you must request a court order before the divorce is final. Otherwise it’s nearly impossible to go back and claim rights to these benefits. An attorney can help track down information about the accounts and file a court order, which is called a qualified domestic relations order (QDRO). A QDRO must be signed by a judge and sent to the plan administrator for approval. You may be able to negotiate who (you or your spouse) pays the lawyer fees for drafting the QDRO and plan administrator fees for processing it.
Avoid Common Mistakes
Don’t let these common mistakes sabotage your opportunity to claim the benefits you deserve:
- Don’t give up if your spouse refuses to share details about retirement accounts and how much they are worth. Better idea: Gather as much information as you can about the benefits earned by you and your spouse, and ask your attorney for help navigating the details. If a spouse worked different jobs, there may be multiple retirement accounts.
- Don’t waive your rights to your spouse’s retirement benefits in exchange for the house (or other assets) without thinking it through. A home can be expensive to keep up, and you could lose money on the resale if you decide to move. Better idea: Downsize to a smaller home and ask for your share of the retirement benefits, which may provide a much-needed financial cushion later in life.
- Don’t stash a lump sum payout from an ex-spouse’s retirement plan in a taxable account. Better idea: Roll the amount into your own employer-sponsored retirement plan or an individual retirement account (IRA). The balance may continue to grow tax-deferred until you reach retirement.*
Get Help
An attorney can help you understand your rights and responsibilities during a divorce. See the blog posts below for more information on finances and divorce. You can contact an investment professional at Hanscom Investment Services today for a no-cost consultation on your investment options. Call 781-698-2236 or visit www.hanscomfinancialservices.org.†
- 10 Tips to Get Your Finances in Order Before a Divorce
- Debt and Divorce: The Basics
- The Biggest Financial Concern Divorcing Couples Have
- Housing Factors to Consider When Divorcing
- Documents to Update After Divorce
- Repaying Debt After Divorce
- Building Credit After Divorce
- Building a Budget After Divorce
* Taxes will be due at ordinary income tax rates upon withdrawal from a traditional individual retirement account (IRA) or employer-sponsored retirement plan. Premature withdrawals (generally, those made before age 59½) may be subject to a 10% tax penalty, too (does not apply to 457 plans).
†Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Hanscom Federal Credit Union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Hanscom Investment Services, and may also be employees of Hanscom Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Hanscom Federal Credit Union. Securities and insurance offered through LPL or its affiliates are:
Not Insured by NCUA or Any Other Government Agency / Not Hanscom Federal Credit Union Guaranteed / Not Hanscom Federal Credit Union Deposits or Obligations / May Lose Value
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