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Retirement Accounts: The Most Overlooked Asset in Divorce

As if going through a divorce wasn’t emotionally stressful enough, the financial aspect of cutting ties with a former spouse can be daunting, to say the least. While alimony, child support, and real property come front-and-center during divorce proceedings an often forgotten asset is just as important – the spouse’s retirement account.

Get What You Are Entitled To

First and foremost, find out where retirement assets are located. Although this may be easier when the relationship is amicable, the case may not be for feuding soon-to-be ex-spouses. Either way, all retirement accounts should be sought including 401(k)s, IRAs and pension plans from current and any previous jobs. If the marriage lasted more than a decade, a former spouse can claim the greater of either their own Social Security benefits or half of their spouses, whichever is greater.

Retirement assets accumulated during marriage are considered marital property. That being said, it does not mean they will be split down the middle during a divorce. Qualified retirement plans are governed by state law and divided using a qualified domestic relations order (QDRO). The attorney representing the spouse during a divorce is responsible for properly preparing a QDRO.

A QDRO specifically instructs retirement plan administrators who funds should be distributed to a spouse who hasn’t participated in the program but has claimed an interest during a divorce. Beyond retirement benefits, an experienced New York divorce attorney should be aware of the need to protect survivor benefits in a QDRO. Simply put, these survivor benefits are an entitlement to receive or continue receiving, distributions beyond the death of the spouse. It cannot be assumed that just because one receives benefits during the life of their spouse – or former spouse – those payments will continue beyond their death. In fact, failure to specifically ask for survivor benefits will likely leave an individual unexpectedly without payments once a former spouse passes.

What You Need to Know to Avoid Costly Mistakes

If you divorce in your 20s, 30s or even your 40s, you may not have much in terms of retirement assets. However, those who decide to end their marriage near retirement age—in their 50s and beyond—have a unique situation to deal with. Due to property division laws, their income will remain the same, but their retirement accounts will have much less money because they will likely need to split them with their partner.

Issues regarding divorce and retirement are becoming more common due to the trend of silver divorces: divorces occurring after age 50. In the past, couples rarely split up after spending 20 or 30 years or longer with the same spouse. Today, people are no longer settling for unhappy marriages. In fact, divorce among baby boomers has doubled in the past 20 years.

Divorcing so late in life can be risky for your financial future. While the emotional pain of divorce can hurt for many years, it’s important to take charge so your retirement plans are not in jeopardy.  Read on to avoid common mistakes.

Avoiding Financial Mistakes After a Divorce

Avoid having to delay your retirement by preventing these common mistakes:

  • Automatically choosing the house over money. While real estate is often considered a worthwhile investment, keep in mind that a house comes with numerous expenses. Not only do you need to pay the mortgage, but there is also insurance taxes, maintenance, and upkeep. Funds in a retirement plan are guaranteed money that you can actually use. Even if you plan to sell the home in a few years, there are no guarantees. The home’s value could depreciate. Take the money instead.
  • Rolling over a retirement account into an IRA. Going this route will incur a 10 percent penalty. Even if you are younger than 59 ½, there is actually a way to withdraw money from a 401(k) without a fee. However, you will need to use a qualified domestic relations order (QDRO) to allocate the assets to your ex-spouse. Your divorce lawyer can help in this regard.
  • Excessive withdrawals. Don’t withdraw too much from your retirement account simply to avoid a tax penalty. If you have a retirement account, assess the amount of money it has in it and compare it to your current and future cash flow. The more money you take out, the more likely you are to spend it. Remember, that account needs to last 20 or 30 years or longer.

Expect the Unexpected

Safeguarding your rights is important at any stage of life, but especially during a divorce. In an ideal scenario, paperwork does not go missing and the process goes through without delays. Unfortunately, real life does not happen this way. Ensuring documentation and retirement asset distribution agreements are received and accepted by plan administrators prior to finalization of the divorce is the best way to hedge your risk during this difficult time.

Protect Yourself

If you or someone you know is facing divorce, contact an experienced New York City divorce attorney today learn about what you may be entitled to under state and federal laws. With years of family law experience, the attorneys at the offices of Alatsas Law Firm guide their clients every step of the way with compassion and legal advocacy. Schedule an initial consultant by calling (718)-233-2903 today