Divorce Complication: Retirement Plans

Next to a home, retirement benefits squirreled away during the marriage make up one of the most valuable marital assets. As such, they are divisible as part of your divorce property settlement.

Retirement benefits include traditional and Roth IRAs, pensions or employee-sponsored retirement plans (i.e., 401[k], 403[b], money purchase, Keogh, SEP-IRA, SIMPLE IRA, and SAR-SEP plans). Some (but not all) retirement plans can be divided by a special order, called a Qualified Domestic Relations Order (QDRO), which is issued by the court and served upon the plan's trustee. Basically the order defines how much of each payment is to go to each spouse in a divorce settlement. If you have several types of retirement plans, a QDRO is required for every retirement plan you share.

If you plan to skip formalizing the disbursement of retirement benefits through a QDRO, because your right to part of your spouse's retirement plans is covered in the divorce decree, be aware that the tax ramifications of such an action are not pretty. Since this area can be extremely complex (think contribution limits, distribution timelines), you need an attorney to draft a QDRO to ensure that you hit all the required marks. This is not a do-it-yourself project.

Some defined benefit plans, military retirement plans, and federal employee benefit plans (Federal Employee Retirement System [FERS] and the Civil Service Retirement System [CSRS]) are not divisible. If you and your former spouse have these types of plans, you are governed by another set of statutory laws. You must see a CPA or financial adviser to determine the value of the benefits since it will affect your overall property distribution.

If you and your spouse have been married for more than 10 years, you can get social security benefits. If you fall within that 10-year rule and meet other requirements, you receive a percentage of your former spouse's benefits. Even Social Security benefits can be compromised (reduced or terminated) depending on the number of times each spouse was married, how much they are receiving, and if either spouse plans to re-marry. See the Social Security web site for additional information.

Once again, splitting divorce-related retirement assets is no easy feat. Not only is it complicated with "how much" of the benefit can be parceled out, but there is also a timing issue.

Consult with a qualified attorney, CPA, and/or other relevant professionals before signing your property settlement. This is no terrain for the intrepid novice. The information above is only a snapshot of the potential problems and in no way constitutes “full disclosure.” Even if you and your former spouse agree with the split, it still pays to run the arrangement by your own counsel to conform to the laws of your state, or the fairness of your proposal.