In many divorce cases retirement accounts are the biggest, or at least one of the biggest, assets. Because of that, it is imperative to understand the options for transferring and dividing retirement assets in a way that maximizes the benefits and minimizes taxes.
Informed Consent is the Most Important Thing when Dividing Retirement in Divorce
You don't want to make significant financial decisions about your future without understanding the financial consequences. Retirement accounts are complicated, vary greatly in their requirements & plan details, and can result in significant tax liability. If you don't feel fully informed when agreeing to how a retirement account or multiple accounts are being divided, then you are taking a financial risk that most likely cannot be undone once your divorce is final. To avoid making uninformed or bad decisions, consult with retirement division and financial experts for information and advice before making these decisions (see below for the author's flat fee options for obtaining this type of advice).
Here are just four ways that lack of information can be costly in a dividing retirement accounts in a divorce:
1. Defined Contribution Plans are different than Defined Benefit Plans - If you treat a pension statement the same as a 401(k) statement you might be leaving a lot of money on the table in your divorce. Pensions typically pay out for an employee's lifetime and can typically also be extended for the lifetime of a spouse or former spouse. This means that the value is not simple to calculate and is often underestimated.
2. Market Changes can be Significant - Retirement account values change due to the investment changes in addition to contributions or withdrawals. A divorce agreement or judgment will identify the division date (after which contributions and withdrawals are not shared), but often market changes are ignored. This can be a real problem if it takes months (or even years) for the transfer of funds to be completed. If you don't identify that market changes are included you risk losing out on any investment gains during the time between the division date and the actual transfer date.
3. Choosing Offset v. Diversification can have Unintended Consequences - Similar to the issues that arise due to market changes between the division date and transfer date, different accounts are going to be invested differently and will change differently between the division date and transfer date. If you agree to offset multiple accounts and only divide from one account you may be saving on QDRO preparation fees but you are risking that the one account used for the offset is more or less favorable of an investment than the others.
4. Failing to Address Survivor Benefits can be Costly - Some retirement accounts cannot be divided until retirement age and for those accounts if you don't also provide for survivor benefits for the former spouse, then the former spouse could end up receiving nothing. Government and private pensions differ significantly on the types of survivor benefits available and on the limitations for those benefits. If you don't address the survivor benefits in your agreement then you could have agreed to divide a pension and end up with nothing if your ex-spouse dies.
How to Get Informed: Retirement Division in Divorce (usually via QDRO or DRO) is complicated and can often result in ongoing conflict after the divorce process was supposed to be over. To avoid this part of your divorce dragging on, Skylark Law & Mediation, PC offers the following service:
Retirement Division Mediation Session (1 hour session for $400) - Justin Kelsey prepares QDROs and DROs for Gray Jay Endeavors, LLC and is an experienced mediator. Putting these skills together, Justin can join your case (whether you are in a mediation, negotiation, or litigation) for a one-time retirement division information and mediation session helping you get the retirement division right the first time! Schedule here