Divorce comes with many challenges—figuring out housing, creating a parenting plan, and managing finances on your own. And that doesn’t even touch the emotional mountain that may be in front of you. Certainly, all those obstacles are a lot to consider all at once. In my experience, addressing one challenge at a time is more effective than trying to tackle everything at once.
One of the least understood aspects is what happens to your retirement accounts. As a Certified Divorce Financial Analyst, here are some common questions I get and how I answer them.
1. How can I split my retirement accounts without getting taxed?
To divide retirement accounts without triggering taxes, you need to follow specific legal procedures. To split 401(k)s and similar employer sponsored plans, a Qualified Domestic Relations Order (QDRO) is required. This document allows the transfer of funds to the non-participant spouse. For IRAs, a divorce decree and specific forms from the custodian are usually enough.
Tip: Work closely with your attorney and financial advisor to draft the QDRO correctly. Mistakes in this document can lead to delays and unexpected taxes.
2. What should I consider when figuring out the value of my retirement accounts in a divorce?
When valuing retirement accounts, think about liquidity, tax implications, and early withdrawal penalties. Retirement accounts are often less liquid than other assets and may incur taxes and penalties if accessed before age 59.5. Compare these factors with other assets like home equity or cash savings to make informed decisions.
Example: If you have a 401(k) and your spouse has a similar amount in a savings account, consider the tax implications and liquidity of each asset. The 401(k) might seem equal in value, but taxes and penalties could reduce its actual worth.
3. Are there any ways to avoid the early withdrawal penalty for retirement accounts in a divorce?
Yes, there are some methods to avoid the early withdrawal penalty. For instance, if the non-participant spouse receives a distribution from a 401(k) under a QDRO, they can avoid the ten percent early withdrawal penalty, though regular income taxes will still apply.
Tip: Consider consulting with a financial advisor before making any withdrawals. They can help guide you on the strategies to help minimize penalties and taxes.
4. How can a CDFA help me with dividing retirement accounts during a divorce?
A CDFA is like a financial GPS during a divorce. We can help you understand the tax consequences, follow legal requirements, and create a fair and equitable division of assets. Our education and experience working on complex divorce scenarios makes us qualified to help prevent costly mistakes and make the financial transition smoother.
Example: A CDFA can run different scenarios to show you the long-term impact of different division strategies. This can help you make informed decisions that align with your financial goals.
5. What are some common mistakes people make when dividing retirement accounts in a divorce?
Common mistakes include not getting a QDRO for qualified plans, ignoring tax implications, and overlooking early withdrawal penalties. Trying to handle everything on your own without a team you trust can lead to confusion and frustration. Without a financial professional, you might miss important details like fair asset division, tax consequences, and the impact on retirement savings and health coverage.
Tip: Start the process early and gather all necessary documents. This includes account statements, plan descriptions, and any relevant legal documents. Being organized can save time and reduce stress.
Divorce is never easy, but knowing what happens to your retirement accounts can make this challenging time a bit smoother. The more information you have, the less daunting the process can seem. With a personalized financial plan that includes different scenarios and recommendations from professionals you trust, you can make smart financial decisions that will set you up for the next chapter of your life. If you have more questions or need personalized advice, feel free to reach out.
Disclosures and Sources:
Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Bend Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Bend Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services. Any opinions are those of Stuart Malakoff and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER, and CFP (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Awbrey Swanson and not necessarily those of Raymond James.
