Navigating the complex financial landscape during a divorce requires careful planning, especially when it comes to retirement accounts.
When a divorce occurs, the financial assets of a couple, including their retirement accounts, are often split. If mistakes are made during this process, the stress of a divorce can be compounded when one or both spouses find that they are subject to unnecessary taxes or penalties.
1. Document IRA divisions in your divorce agreement
To properly divide an IRA as a result of a divorce, specific language on the structure of "who gets what" should be included in the marital settlement agreement (MSA) or other divorce agreement. A copy of this executed agreement should be given to the IRA custodian. The money should NOT simply be withdrawn from the IRA and given to the other spouse, as this would be treated as a taxable distribution for the IRA owner. The funds should instead be transferred to the receiving spouse's IRA.
2. Obtain a QDRO for employer retirement plans
Employee Retirement Income Security Act (ERISA) plans can't be split by a Marital Settlement Agreement (MSA) or divorce agreement. They require a special court order, known as a Qualified Domestic Relations Order (QDRO). Once a QDRO has been issued, it should be sent to the ERISA plan's administrator. The terms of the plan will determine when the spouse receives the funds. In some plans, a lump-sum distribution will be available immediately, while in other plans, benefits may not be payable until the ex-spouse has a triggering event.
3. Make strategic decisions about received retirement funds
If you are receiving a distribution pursuant to a QDRO, you will want to consider if you will be using any of the funds prior to age 59 ½. Funds received directly from a plan under a QDRO are exempt from the 10% penalty. If you roll those funds over to an IRA and later take a distribution prior to age 59 ½, the 10% early distribution penalty will apply.
4. Name new/update beneficiaries immediately
One of the most common mistakes after a divorce is the failure to properly update beneficiary forms. This is NOT something that should be overlooked. There have been many documented cases where a failure to properly update beneficiary forms led to an ex-spouse receiving funds that were intended for children or even a new spouse. DON'T let this happen to you.
5. Reassess retirement preparedness
For many, a divorce is an emotionally draining and traumatic event. But for some, the emotional impact is compounded by a significant change to personal finances. So just like any other major life event, it's beneficial to reevaluate your retirement and financial plans to determine the best course of action.
Guiding You Through Divorce with a Holistic Approach
The financial decisions made during divorce can significantly impact your retirement security for years to come. At JL Smith Holistic Wealth Management, our goal is to help you feel more confident in your financial decisions so you can focus on moving forward. A great way to do this is by addressing all aspects of your financial well-being during this challenging adjustment.
Our holistic planning approach is particularly valuable when navigating divorce. Rather than looking at retirement accounts in isolation, we consider all aspects of your financial life. From asset management and tax strategies to protection needs and legacy planning, we will assess how well they all work together. This comprehensive method helps to ensure nothing falls through the cracks.
Ready for Financial Clarity During Divorce?
Many of our divorced clients tell us they appreciated having a trusted advisor who could provide both professional and emotional support during this significant life change.Remember: you don’t have to navigate this complex financial terrain alone.
Schedule a complimentary consultationtoday to discover how our holistic planning process can help grow and protect your wealth and provide peace of mind for this next stage of your life.
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This material was developed and produced by Ed Slott and Company, LLC to provide information on a topic that may be of interest. Ed Slott and Company, LLC is not affiliated with The JL Smith Group or Prosperity Capital Advisors (PCA).