Avoiding Mistakes in a Divorce

Even in an amiable divorce, emotions can run high.  Keeping focused on a path forward, emotionally, mentally and financially is important.

A common place for couples to start is splitting the assets equally – especially in community property states like Idaho.  A spreadsheet can be helpful listing out assets in columns:  His, Hers and Joint.  However, you don’t necessarily need to split each account equally.  The total of the accounts needs to be split equally.  For example, you may each keep your own IRA and split a large 401(K).  

Qualified Plans in Divorce

To allocate a qualified plan like a 401(K) requires a special court order, known as a Qualified Domestic Relations Order (QDRO).  Once a QDRO has been issued, it should be sent to the qualified plan’s administrator.  The terms of the plan will determine when the spouse receives the funds.  In some plans, a lump-sum distribution will be available immediately while other plans like pensions may not be payable until the ex-spouse has a triggering event.  For example, you may have to wait until the ex-spouse begins drawing the pension before you are eligible to draw your allocated share of the pension. 

IRAs in Divorce

If you decide to split an IRA, you will need specific language on “who gets what” to be included in the marital settlement agreement (MSA) or the other divorce agreement.  A copy of this agreement should be given to the IRA custodian.  

It may seem easier to withdraw the monies from your IRA and give it to your ex-spouse.  This will be treated as taxable income to you.  Instead, the funds should be transferred by the custodian to your spouse’s IRA.

Receiving Monies from Retirement Accounts

If you are receiving a portion of your spouse’s IRA, transferring it to your own IRA will avoid incurring tax and the 10% early distribution penalty.

If you are receiving money from a QDRO, you will want to evaluate how you plan to use the monies.  Withdrawals from a QDRO is taxable income but not subject to the 10% penalty.  You may need to take draws for living expenses as you transition.  Or you may need a down payment on a new house.  While the money is in the QDRO it is free of the 10% penalty for early withdrawals.  Once you roll it into an IRA, you no longer have it free of the early distribution penalty if you are under 59 ½.

Be aware the plan will rule how you take distributions.  You may be allowed several draws.  Or you may be allowed one.  In one divorce the client waited until she was able to obtain a loan to buy a house.  She took a draw for a house downpayment.  The plan required she fully distribute the funds.  She rolled over the balance into her IRA.  The QDRO had served its purpose.  

Update your Beneficiaries

Once you have transferred all the accounts affected in the divorce, be sure you update your beneficiaries.  This is something you want to do every time you have a life changing event.  You may also put a Transfer on Death for individual accounts.

Update your financial plan.  

Your life has shifted.  It’s time to do a reassessment of your financial plan.  Like any other major life event, it’s beneficial to re-evaluate your retirement and financial plans to determine the best course of action.  

Our office is here to help you. 

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