Avoid costly mistakes when dividing joint retirement accounts

On Behalf of | Feb 7, 2020 | Divorce

Dividing possessions during a divorce can be agonizing. But often, the most challenging ones to split are shared retirement funds. For wealthy couples, joint 401(k)s and IRAs can represent a large portion of their nest egg. If the split gets implemented incorrectly, you and your spouse could end up with an expensive tax bill.

Even during a contested divorce, you should know what’s at stake. Luckily, there are ways couples can ease the financial burden of the division process.

The process can depend on the type of retirement plan

If your spouse gets retirement options like a 401(k) or a pension through their employer, you may be entitled to a percentage of those funds. If that’s the case, you could get it through a qualified domestic relations order (QDRO), which can help transfer the funds to a rollover IRA. To obtain one, an attorney may have to contact the retirement plan’s administrator and make sure they take the required steps for a hassle-free transfer. However, before giving this information to the court, you may want to make sure it reflects you and your spouse’s wishes in the divorce.

For those who have either a joint traditional or Roth IRA, a QDRO isn’t always necessary for asset division. But you may want to make sure the split gets done properly to avoid tax penalties.

What to watch out for

If you are a recipient of your spouse’s retirement plan, you want to make sure you don’t agree to a beneficiary change before the divorce gets finalized. Otherwise, the following could happen:

  • You may not have the right to your spouse’s retirement funds because they passed away.
  • You may not have a say in what percentage you get of the retirement fund.
  • Your assets may not have the same financial protection if you’re headed for bankruptcy.

The division process can come with complications

Dealing with a divorce can take an emotional toll on any couple. And when they’re in the process of diving complex assets, it can be burdensome to make such tough decisions. Luckily, wealthy couples can maneuver through these challenges with sound legal counsel.