During divorce, retirement accounts should be handled with care
When couples in Michigan divorce, they may find that the financial aspects of ending a marriage can outstrip even the emotional obstacles. This can be especially true in the case of retirement funds, which generally represent significant investments. Often, both parties plan to rely on the savings in these funds for their financial futures. Not surprisingly, the division of retirement assets can be a contentious and sensitive matter.
It’s important for couples to understand that retirement funds are governed by a number of specific financial and legal regulations. Therefore, dealing with the distribution must be handled in accordance with these guidelines. Mistakes in distributing retirement accounts after a divorce can lead to a loss of money through taxes and penalties.
For retirement accounts that are based at the workplace of one of the spouses, a special court order called a qualified domestic relations order is necessary. The QDRO will reflect the division plan stated in the divorce agreement. However, the order must be specifically requested from the court. Each retirement fund to be divided, whether a 401(k) or traditional pension, requires a separate QDRO. The order should specify whether the funds will be rolled over into an IRA or distributed directly. In the latter case, the recipient would pay taxes on the funds.
To help ensure a smooth process, a lawyer could draft the QDRO and have it approved by the court. The family law attorney could then work with the plan representatives to make sure the division of the funds proceeds as specified in the order.