Divorce can be one of the most challenging experiences, especially for couples who’ve shared many years together. The emotional and financial toll can be overwhelming. A significant part of this process is the fair division of marital assets, including retirement accounts.
For many older spouses, pensions often represent a substantial portion of their wealth, making it essential to divide them equitably. Ensuring a fair split of these assets can help both parties move forward financially secure.
What is a QDRO?
Qualified Domestic Relations Orders (QDRO) are legal documents facilitating the division of retirement plan benefits during a divorce. According to the IRS, a QDRO is an order directing retirement plans to allocate funds for marital property rights, alimony or child support to spouses or other dependents.
QDROs are essential for ensuring you receive the retirement benefits you are legally entitled to from your ex-spouse’s plan. These orders apply to qualified retirement plans governed by the Employee Retirement Income Security Act (ERISA), such as 401(k) and pension plans.
However, QDROs do not apply to Individual Retirement Accounts (IRAs), which can be divided through a divorce or separation agreement.
Defined contribution vs. defined benefit plans
Retirement plans come in two main types:
Defined contribution
A 401(k) is a common example of a defined contribution plan. These plans have a daily cash value or balance, making them relatively easy to value and divide. The court can use a QDRO to split these plans during divorce. You can roll over any payments you receive from your ex-spouse’s 401(k) into another retirement account without tax consequences.
Defined benefit
Pensions and other defined benefit plans promise to pay a set amount each month at retirement. These plans are harder to value because they do not have a current cash value. The court can use a QDRO to divide these benefits. There are three standard methods for distribution:
- Present value/cash out: Provides a lump sum benefit
- Deferred division: Grants each spouse a share of benefits when paid by the plan
- Reserved jurisdiction: The court retains authority to order future distributions
Each method determines how and when you will receive your share of the pension benefits.
Key considerations for dividing a pension
Working with an experienced divorce attorney is crucial for equitably dividing retirement plans. A knowledgeable lawyer understands how to accurately value these accounts and can help you weigh tax implications, how they fit into your future financial needs and other critical considerations.
Dividing retirement plan assets in a divorce can be a complex and lengthy process. Understanding your rights beforehand can ease some anxiety. Working with skilled legal, tax and financial advisors can ensure an equitable division of assets.