Aside from the family home and vehicles, retirement plans (401k plans and
defined benefits plans) are considered one of the significant source of
assets in a marriage. It is important to properly handle these assets when
divorce arises, since ignoring them or inadequately dividing them can result in
substantial financial loss for one or both spouses. Understanding how
to mishandle retirement plans in divorce can help you avoid these pitfalls
and make a successful transition into the next chapter of life.
The following are common ways couples involved in divorce mishandle retirement plans:
Ignoring retirement assets. Typically couples avoid dividing their 401k or retirement assets due to
the belief that the division process is too complex or the account balances
are about the same. While it may make sense not to divide the retirement
accounts based on the particular financial situation of a marriage, one
or both spouses may not have the means to cover certain types of debt
associated with divorce.
Failing to use a QDRO to divide retirement assets. Many people will try to divide their retirement assets on their own by
withdrawing money to give it to the other spouse directly without using
a QDRO. Unfortunately, dividing retirement this way makes the withdrawn
portion taxable income added to the ordinary income for the year, resulting
in a significant amount of income tax and possible penalties to the IRS.
Not protecting the retirement accounts prior to the finalization of divorce. If a divorce petition is filed without any temporary restraining orders
(TRO) which prevent liquidation of retirement assets, then nothing can
stop an account owner from clearing out the account. It’s imperative
to submit a domestic relations order (DRO) in order to let the plan administrator
know to place a hold on any distributions, as well as a TRO to prevent
liquidation of financial assets.
For more information about handling retirement accounts involved in divorce,
contact Stepniak & Park and request a
free consultation with our Daytona Beach family lawyer.