How Are Retirement Assets Treated in a Divorce?
For many marriages, retirement accounts are the largest assets to be dealt with in a divorce. Knowing how to treat different types of retirement assets is key to protecting your financial future and avoiding unintended consequences down the road.
A qualified domestic relations order (QDRO), helps divide a couple’s retirement assets during a divorce. Once they are court approved, QDROs permit such things as a custodian of a 401(k) making payments to an employee’s former spouse.
If a QDRO is worded improperly, it can have dire financial consequences. For example, a husband and wife intend to split equally an account worth $100,000. They state in their QDRO that the wife is entitled to $50,000. If the value drops to $60,000, the husband receives significantly less. If the value increases to $150,000, $50,000 no longer represents half. Thus, if the value of a retirement account fluctuates, a clause allocating a specific dollar amount to one spouse can lead to unexpected or unfair consequences.
The intent of the parties must be clear and take into consideration all possibilities, regardless of how unlikely. Some common mistakes in QDRO’s include:
- Not taking into account the type of retirement plan at issue. There is a major difference between defined-benefit plans like pensions and defined-contribution plans like 401(k)s
- Not differentiating between an income-producing plan and other types of retirement plans
- Failing to differentiate between qualified plans, which can be divided by QDROs, and nonqualified plans, which are not subject to QDRO rules
- Failing to realize that a nonqualified plan cannot make payments to anyone other than the employee, regardless of language contained in the QDRO
To avoid these pitfalls, it is crucial to educate yourself about all aspects of your retirement plan. Provide this information to your attorney so a QDRO properly tailored to your needs can be created. Consult an experienced New York divorce attorney who can evaluate your unique situation and provide effective representation. Se habla español.