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The retirement account mistake many people make after divorce

On Behalf of | Feb 9, 2023 | Property Division |

Unless a divorcing couple negotiates specific arrangements to the contrary, chances are good that their retirement accounts will be subject to division during a divorce. Any marital income contributed to the accounts are likely to be considered part of the marital estate.

It is common for spouses to agree to divide their retirement accounts directly. The courts may also order the division of someone’s retirement savings, even when only one spouse has their name on the account. Those preparing to divide retirement savings will likely have their lawyer draft a qualified domestic relations order (QDRO) to formalize these arrangements. They can then submit it to the courts for approval.

Unfortunately, many people make a critical mistake when it comes to QDROs that ends up hurting their financial stability later in life.

They fail to file their QDRO with the appropriate parties

Drafting a QDRO and then having the courts affirm that it properly aligns with the property division order in question is only part of the dividing a retirement account process. The approved paperwork still requires submission to the investment company or financial planner handling the retirement account.

The professional or business managing the retirement assets can then divide the account by creating a new account in the name of the spouse receiving some of the original account’s value. They will then  transfer a set percentage of the total balance into a new account in the other spouse’s name.

The mistake that people often make is that they do not present the appropriate party with documentation detailing the division of the affected retirement savings. Having a QDRO will not do much good if you do not take the steps to have the affected account divided. Those who fail to record a QDRO could find themselves in a difficult position wherein they will receive less than they originally would have.

For example, the spouse who holds the account may realize that there has been a delay, and they might make a sizable withdrawal from the account, possibly incurring penalties, before the QDRO is submitted by their ex. The account could drastically reduce in size, which would be problematic for the beneficiary who should be receiving a specific portion of the account balance.

The sooner you finalize property division matters, like submitting a QDRO and dividing retirement accounts, the sooner you can start moving on with your life. Learning from the mistakes that others make can help you better manage property division challenges as you divorce.

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