You wanted both your marriage and your savings for retirement to last your entire life. When divorce occurs, especially after the age of 50, it disrupts every aspect of your life. Just because your marriage did not turn out like you originally planned, that does not mean you are a bad person or that you are going to be unable to enjoy a comfortable retirement. Focus on the positive things you have accomplished in your life, learn from mistakes, understand how divorce affects a retirement plan, and after assessing your situation, you will be better prepared to map out the next phase of your life.
Assessing a retirement plan value
The money in a 401(k) is not accurately valued at the dollar amount in the account like it would be for CDs or other investments. Retirement plans are tax deferred and not intended for use prior to later life. There are going to be fees and tax penalties for any early withdrawal. These accounts are still viewed as marital property that must be divided for a divorce settlement. Your age and tax bracket at the time you begin drawing from it has a great deal to do with how much of the plan is actually going to be available. The closer a person is to retirement age, the easier it is to estimate the tax obligation on withdrawn funds. Congress has also relaxed some of the requirements for distribution and transfer of this asset when it is done as a result of divorce.
Qualified Domestic Relations Orders
Known as a QDRO, this legal instrument lets the administrator of your retirement plan pay benefits to a person that did not earn the income. To do this without a QDRO is illegal under federal law. The QDRO is a separate legal document from the divorce decree. It is most commonly used for transferring funds from company profit sharing plans, private pension accounts, 401(k) accounts, 403(b) plans, 457 plans, and any other tax-sheltered annuity. A QDRO is usually not needed for your social security benefits or an IRA.
Qualified vs non-qualified plans
A qualified plan, such as a 401(k), is designed to provide individuals with additional tax benefits on top of other traditional retirement accounts. Earnings are deducted pretax. The contributions and earnings on the account are tax-deferred until the individual begins removing funds from the account. As the name implies, a non-qualified plan, like an IRA, is not eligible for the same tax-deferred benefits.
Qualified plan options
The QDRO does not create a new retirement plan. It is a court order that prescribes the transfer and distribution of your account to a non-participant spouse. They may have the option of leaving funds in the 401(k) or another retirement account. The court can also allow them to rollover the funds to their own IRA. Another options involves them receiving part of the funds and transferring the remaining balance to an IRA. If they opt for a complete cash out of their allocated funds, they will have to pay all applicable taxes and early withdrawal penalties.
Options for non-qualified plans are less complicated. You can choose to change the name on your IRA or make a direct transfer of funds to your former spouse's new or existing IRA. According to I.R.C. §408(d)(6), if this transfer is made by a divorce decree or other written document that is related to a divorce decree, this transfer of funds is tax free.
If you remarry
Usually a QDRO entitles your former spouse to a portion of your retirement plan that accrued from the time you got married until you got a divorce. They should not be entitled to any contributions made before the two of you were married or after the two of you divorced. This money is considered a marital asset and they will most likely retain their rights to these funds even if they remarry. If the court has ordered the QDRO to be used to provide for alimony or child support payments, distribution may be affected by them remarrying. The courts will usually only do this if your retirement is being used as your primary source of income. The specific wording of survivor benefits in a QDRO is very important. If your ex-wife has survivor benefits in the QDRO, she will continue to receive funds regardless of whether or not either of you remarried. Upon your death, survivor benefits will typically go to your new wife. It is very important that you fully understand the language and wording of any QDRO. This is best explained by a qualified attorney with experience in all aspects of family law.
At Kenny Leigh & Associates, we are dedicated to protecting the rights of men just like you in all matters of divorce, alimony, and child custody. For the advice and counsel you need to ensure your future retirement needs are met, contact us today.