Retirement Plans and Divorce: How Will Divorce Affect Your Retirement Savings?

One concern that a lot of people have when they get divorced is how the divorce is going to affect their retirement plan. Some of the questions that many professionals ask about this topic include: will the entire plan be dissolved and the assets divided, will it impact their ability to retire when they want to and how will the division be handled? All of these questions are valid, and you need to find the answers before you agree to any divorce settlement.

The QDRO

The first thing that you need to learn about is the QDRO, which stands for qualified domestic relations order. This is the legal document that is going to dictate how your retirement plan is handled during and after your divorce. It is going to provide you and your soon-to-be former spouse with the definitions needed to handle the division and distribution of the assets found in your retirement plan. These definitions will include: when the assets will be divided, what assets will be distributed and how the assets will be divided.

In order to be a valid QDRO, two things have to happen. First of all the qualified domestic relations order has be created correctly, and secondly it needs to be verified. If either of these steps are skipped, then the QDRO is void.

Why You Need a QDRO

The main reason you need a QDRO in place is to protect your interest in the retirement fund's assets. If the owner of the retirement plan dies during, or shortly after the divorce and no QDRO is in place, then the ex-spouse may lose their ability to claim those assets. This is why it is very important to make sure you have a QDRO in place, especially if you are not the owner of the retirement plan.

Tax Concerns

Now that you understand what legal instrument is used to handle the division of your retirement fund, you next need to learn about the tax issues that you may face because of the division. First of all, when assets are taken from your retirement plan during a divorce you do not have to pay the normal 10 percent early withdrawal fee. However, if you or your soon-to-be ex-spouse does not roll this money over into a new qualified retirement plan, like an IRA, then you may be subject to normal income taxation on the money that was withdrawn.

Conclusion

The affects of divorce on children goes way beyond emotional trauma resulting from the separation of their parents. Divorce can also create long term financial problems resulting from a division of family resources. To make sure that everyone in your family is taken care of, including yourself, you will want to talk with a financial planner to ensure that you have enough money to cover your living expenses once you retire and to ensure that your retirement plan is divided properly. It may be helpful to enlist the help of a divorce mediation specialist when discussing how your retirment plan needs to be divided to make everyone happy.