Many divorcing couples have questions about the fate of their retirement savings, especially if they are preparing to retire in the next few years. In general, spouses must divide these assets equitably, but that does not necessarily mean splitting the accounts in half.
Understanding the process of dividing retirement accounts can help you navigate this challenge.
Identify and value accounts
Begin by identifying and assessing the types of retirement accounts involved. Common accounts include 401(k)s, IRAs, pensions and other employer-sponsored plans. Each type may have different rules and implications for division.
Obtain current statements or account summaries to determine the account’s present value. Consider consulting financial professionals for a precise appraisal.
Negotiate asset division
Many couples use the concept of equalization to divide retirement accounts. In this method, you calculate the total value of marital assets, including retirement accounts.
Couples then work to achieve an equitable distribution. For example, one spouse may retain a higher portion of the retirement accounts if the other spouse prefers to keep other valuable assets in exchange.
Approach the division of retirement accounts collaboratively. Engage in open and honest communication to discuss preferences, priorities and potential trade-offs. Amicable decision-making can lead to a more satisfactory and mutually agreeable resolution.
Complete a QDRO
A Qualified Domestic Relations Order is a legal document that allows the division of retirement accounts without tax penalties. The account owner must draft and submit a QDRO to the plan administrator for approval.
This step ensures compliance with regulations and helps you avoid unnecessary fees. However, certain transfers may incur taxes or penalties. Make sure you understand the full implications of account division before moving forward.
On average, American adults ages 45 to 54 have $254,720 saved for retirement. When dividing these significant assets, prioritize the future financial stability of both parties with an equitable arrangement.