When it comes to splitting assets during a divorce in Cobb County, the house and retirement funds are usually the biggest. As the housing market tumbles, retirement assets are taking center stage.
But deciding who gets what and how much when the Golden Years roll around can be tricky.
“That old saying that ‘the devil is in the details’ is especially true when it comes to dividing up retirement assets in a divorce,” said Martin Shenkman, a lawyer in New Jersey. “After all the trauma of a divorce, people don’t want to do the detailed paperwork, but you need to.”
Retirement funds accrued during the marriage, are considered marital assets and are hard to get excluded from a divorce settlement. “It is generally up to the person claiming a different designation to prove it in court,” said Maury Beaulier, an attorney based in Minneapolis, Minn.
What Your Ex-Spouse is Entitled to
Your marriage could have ended more than 20 years ago, but your ex-spouse may still be entitled to part of your retirement.
If a marriage laster longer than 10 years, your ex can claim Social Security at a rate of spouse contribution. Social Security is not usually addressed during a divorce, but it’s good to know that they can be entitled to part of it.
“An unmarried, divorced spouse is entitled to 50% of [her/his] former spouse’s Social Security starting at age 62,” said Clay Caldwell, a certified financial divorce practitioner.
The law sees marriage like a contract or starting a business partnership, Beaulier said.
“When two people get together, each owns 50% of a business–even if one sits at home–so the theory is the efforts of a homemaker to marriage is just as much as the person in the workforce,” said Beaulier.
The type of fund doesn’t matter: Whether it’s a pension, 401(k) or profit-sharing agreement, it will most likely be split up in your divorce settlement.
The best way to split up qualified accounts like 401(k)s and ESOPs is to use a Qualified Domestic Relations Order [QDRO] in your settlement. A QDRO establishes what each party is entitled to designates the amount of tax each party pays on the account.
Choosing not to use a QDRO is risky and can leave you paying taxes on money distributed to your ex.
Splitting your retirement can be as complicated as splitting hairs, and making a wrong decision could cause a financial disaster in your vintage years. Here are five ways to protect your retirement nest egg:
Track Your Assets
The best way to preserve your assets is to have clearly defined agreements relating to those assets, Beaulier said. A prenuptial agreement that fully discloses all the assets and liabilities of each party before the union and an agreement for how the assets will be handled if a divorce occurs is crucial
Because retirement benefits are considered marital assets, you have to determine the present value of each plan.
“Retaining records of what each person has when they enter into marriage can save thousands of dollars in a divorce,” Beaulier said.
It is also a good idea to keep quarterly reports of retirement records and the interest they accrue during the marriage.
Create the Right Account
When money is distributed from a qualified plan, it will have to be put into an IRA, since most plans don’t allow you to take a portion of someone else’s 401(k) and add it to your 401(k).
Once an agreement over who is entitled to what is reached, you want to make sure you have the money transferred to an account where it won’t be taxed.
If you decide to take the distribution from the fund right away, you are going to pay taxes on it, Caldwell said. But if you choose to defer payment, place the money into a qualified plan like an IRA.
Revaluate and Diversify your Funds
Reworking your retirement investment strategy is a step most people overlook after a divorce, said Shenkman.
“Most people do exactly the opposite,” Shenkman said. “A divorce wreaks havoc on investment planning and people, but you need to keep a diverse portfolio. Most of the time both people are left with disjointed portfolios.”
Shenkman recommends sitting down with a financial planner to look at your new financial life. Decide where you are, where you want to go and determine how you are going to reach your financial goals.
Familiarize Yourself with your Spouse’s Benefits
One of the biggest mistakes Caldwell sees people make is not knowing to what they are entitled under their spouse’s plan. Many plans are complicated, he said, and include a lot of stipulations and requirements.
“Once you know what [your spouse’s] benefits are, you can have them valued if you want an immediate distribution,” Caldwell said. He suggested that you know “when your spouse was enrolled in the benefit program, how long they worked, any retirement incentives, survivor benefits and cost of living increases.”
Change Your Beneficiary
As soon as the divorce is final be sure to sign new beneficiary designations. If you don’t, your ex could get your plan.
Often these forms are online and can be mailed to the sponsor. “So many banks keep getting bought out and then the stuff gets lost and sent to merger-merger never-land,” Shenkman said. Be sure to send it through certified mail and save the receipt to prove you changed beneficiary, he said.
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