Financial decisions are an essential component of the divorce process on both sides. These include how any assets, estates, bank accounts/funds that may have been attained during the marriage, or any other financial possessions that one or both parties have a legal interest in will be divided.
Retirement savings tend to be one of the larger and more valuable assets that people own. Because of this, it also happens to be one of the most important matters in divorce proceedings. Not only is it an important issue, but it also has the tendency to become very complicated, as there are tax implications involved and has to be handled in the right manner by the attorneys and the court.
Some retirement plans, such as the common 401(k), otherwise known as a pension plan, are sponsored by one’s employer. If your spouse has this type of retirement plan, you are legally entitled to a part of that balance, unless there is a pre-existing prenuptial agreement that explicitly states that this would not be the case in the event of a separation. This stands true regardless of who the primary earner is.
How to Protect Your Retirement Fund from Divorce?
To protect the non-breadwinner’s share of the retirement fund, there is a Qualified Domestic Relations Order or QDRO in place. A QDRO is used to protect the non-breadwinner spouse’s interests. It is a court order or decree that encompasses many other issues that come up in divorces, like child support, alimony and property rights. This is one court judgment the spouse would have to follow, and it includes a plan for how the couple will split the plan benefits.
Moreover, a QDRO differs from most marital settlement agreements because it allows the funds in the retirement plan to be divided and withdrawn without the penalties, and can be transferred into the non-breadwinners retirement account, which is generally an IRA.
Please note that QDRO’s only apply to retirement plans that are IRS tax-qualified and covered by the Employee Retirement Income Security Act (ERISA). QDRO’s are also not necessary to divide IRA or SEP assets.