Retirement funds often become a focal point during the property division phase of a divorce.
You may wish to brush up on applicable laws to increase your comfort level because dividing retirement accounts can become a complex process.
Understanding the QDRO
A Qualified Domestic Relations Order (QDRO) is a legal document that tells the administrator of a 401(k), pension or another employer-sponsored plan how to distribute funds in a divorce. The QDRO verifies that each party has a right to a certain portion of the money. Each of these accounts requires a separate QDRO. You may also need a “transfer incident” for the tax-free movement of individual retirement account funds.
You have a few options to consider when receiving retirement plan distributions. You could roll the funds into your own retirement account, cash out the portion allotted to you or defer taking any funds until the holder of the account retires. No matter what you decide to do, remember to add or remove the beneficiaries. Suppose your children are to be your primary beneficiaries. In that case, you may want to consider setting up a revocable trust on their behalf and name the trust as a beneficiary of your account.
Addressing tax consequences
Tax consequences differ from one type of retirement account to another. For example, you make a pre-tax contribution to a 401(k) but you contribute to a Roth IRA after you pay income tax. The withdrawal of funds from certain accounts comes with income tax consequences.
If you and your spouse are facing an amicable divorce, you may wish to work together on the division of your retirement accounts. This would make property division go more smoothly, but make sure you keep accurate records of your retirement fund teamwork.