When a couple decides to divorce, they likely know that their property will need to be divided equitably and their home or bank accounts may come to mind. They may not be aware, however, that retirement plans are included in property division.
Retirement plans
Retirement plan balances usually reflect many years of consistent contributions that have grown in value. In fact, they may be the most valuable asset an individual has. That’s why some individuals may feel uneasy if they don’t know how that could financially impact him or her after the divorce.
Both spouses may be entitled to a portion of their former spouse’s retirement plan assets. These assets are usually held within an employer-sponsored retirement plan or a pension plan.
Qualified domestic relations order
A qualified domestic relations order (QDRO) is a court order that informs the employer how to pay the receiving spouse funds from the retirement account. A QDRO only applies to IRS tax-qualified plans subject to the Employee Retirement Income Security Act. Government or military pensions are governed by other laws.
Defined contribution plan assets, like 401ks, may be easier to calculate than defined benefit plan assets, like pensions. This is because of the complex calculations that may be required to determine those payments.
It’s important for former spouses to understand how much they can expect to receive from the other spouse’s retirement assets, because it may determine the amount they can factor into their own retirement budget, as well as help them decide whether they will need additional income to meet their living expenses.
Retirement assets must be divided correctly and there is help available to do so.