If you are trying to have a
low-cost, do-it-yourself divorce, it may seem reasonable to just split up the
retirement assets and each go your separate ways.
While many couples dissolve their
marriages without significant legal involvement, divvying up retirement
accounts, particularly pensions, is thorny. Doing it without a proper legal
agreement could stick you with a hefty tax bill and penalties. In some cases,
one party may end up with nothing.
How much could a retirement
mistake cost you? Michelle Buonincontri, a certified divorce financial analyst,
reviewed one case after the fact, that amounted to $110,0000 in taxes and
penalties. The higher-earning spouse had withdrawn $250,000 from a 401(k)
account to give to the other spouse, without what is known as a qualified
domestic relations order (QDRO). The tax, at 39.6 percent, was $85,000, and the
10 percent early distribution penalty was $25,000.
The couple could have avoided
that financial hit by hiring an attorney who specializes in QDROs to file an
agreement in conjunction with their divorce. Moving the money directly into
another retirement account with the proper paperwork, would mean no penalties
and fees. Cashing it out could save money by shifting the distribution to the
lower-earning person’s tax bracket.
“It’s the do-it-yourself age, and
we spend more time cleaning up mistakes,” said Janis Cowhey, a partner at
Marcum LLP, an accounting firm based in New York, who often sees divorced
couples mishandling retirement funds.
When it comes to pensions,
complications abound, because every one of them has unique rules. If you do not
execute the legal agreement properly, at the time of divorce, the consequences
can be severe.
Chris Chen, a certified financial
planner in Waltham, Massachusetts, said state pensions in his state may not
allow for the divorced spouse who is due a part of the pension to collect any
funds after a remarriage. He said this often escapes notice in Massachusetts,
where 70 percent of divorces are DIY.
Tim Voit, a QDRO analyst based in
Bonita Springs, Florida, has seen a number of cases where the spouse with the
pension died shortly after the divorce was final, but before any QDRO was
signed. Without the proper paperwork in place, the surviving spouses got
Voit’s best advice: Do not get
divorced unless the QDRO is completed and ready to be signed simultaneously.
The cost of getting an agreement
is reasonable. Experts say you should expect to pay $500 to a few thousand
dollars. What is key to saving yourself headaches is finding a qualified
preparer. Most family law attorneys will not know how to do it right and will
waste a lot of time and money on drafts.
Look for somebody with financial
training. Voit developed certification for QDRO preparers through the American
Association of Certified QDRO Professionals (aacqp.com).
Another thing to look for is how
the preparer launches into the process. Many will draft an agreement, and then
send it to the retirement plan custodian for approval.
“A slight change in wording can
cost tens of thousands of dollars,” said Voit.
Start first by asking the
retirement plan sponsor for their model agreement, then adjust for state laws,
Another important step is to make
sure your attorney is digging up every possible retirement account, so as not
to miss significant assets. Old pension plans sometimes lurk out there.
Finally, each spouse should
decide if splitting the retirement assets, particularly with long-term payoffs
like pensions, is the right way to go or if there should be some other kind of
“It’s like ‘Let’s Make a Deal,'”
said Voit. “Do you want money now or do you want to get double in 20 years?
It’s a trade-off.”