During a divorce, dividing assets like the family home can be emotional. But no financial issue is more complex than the division of retirement assets. These accounts, built over decades, often represent a couple’s largest pool of money. A single mistake or a misunderstanding of the law can have devastating consequences. The wrong move can trigger massive tax bills, forfeit your rights to a fair share, or wipe out your nest egg. Certain divorce outcomes that can erase retirement assets are all too common. They can turn a difficult transition into a future financial crisis.
Here are six critical mistakes that can destroy your retirement savings during a divorce.
1. Failing to Secure a QDRO for a 401(k) or Pension
This is the biggest and most common mistake. A 401(k) or pension is in the employee spouse’s name. You can’t just “write a check” for half the balance. You need a special court order called a Qualified Domestic Relations Order (QDRO). This order lets you transfer funds from one spouse’s plan to the other’s IRA without taxes and penalties. Your divorce decree might state you get 50% of the 401(k). But if you fail to file a QDRO, the transfer is not legally valid. You could lose your share forever if your ex-spouse dies, retires, or quits before the QDRO is in place.
2. Forgetting to Update Beneficiary Designations
Your divorce decree does not automatically change the beneficiary on your IRA, 401(k), or life insurance. If your ex-spouse is still listed as your primary beneficiary and you die, they will get the money. This is true regardless of what your will or divorce decree says. A Supreme Court case upheld this principle. The person named on the form wins. Failing to update these forms immediately after a divorce is a catastrophic but avoidable error.
3. Misunderstanding the Value of a Defined-Benefit Pension
It’s easy to value a 401(k) by looking at the statement. But a defined-benefit pension is much harder to value. It promises a monthly payment for life in retirement. Its “present value” depends on complex actuarial calculations. These include life expectancy and interest rates. One spouse might agree to keep their “small” pension in exchange for a larger-looking 401(k), not realizing the pension’s guaranteed income was more valuable.
4. Ignoring the Tax Implications of Different Assets
Not all assets are equal. A dollar in a savings account is different from a dollar in a traditional 401(k). The money in the 401(k) is pre-tax. You will pay income taxes on every dollar you withdraw in retirement. The money in the savings account is after-tax. A common mistake is for one spouse to take the 401(k) and the other to take a brokerage account of equal value. This ignores the 401(k)’s significant future tax liability and results in an unequal division of the assets’ true worth.
5. Trading Retirement Funds for the Marital Home
This is an emotional decision. One spouse often wants to keep the family home for stability, especially if children are involved. They might agree to give up their claim to their partner’s retirement accounts in exchange for the house equity. This can be a terrible financial trade. The house is an illiquid asset with ongoing expenses. The retirement account is a liquid, income-producing asset. This trade can leave one spouse “house rich and cash poor” in their old age.
6. Allowing a Spouse to Take a 401(k) Loan Before the Split
You must be aware of your spouse’s actions if you know a divorce is imminent. A spouse could take a large loan from their 401(k) right before the divorce begins. This reduces the account balance available for division. While the spouse must pay back the loan, the marital asset has been depleted if they default. It’s a sneaky way to pull money out of the pot before it’s officially split. It can be difficult to claw that value back during negotiations.
Protect Your Future During a Separation
Navigating a divorce is emotionally and financially taxing. You must work with a qualified divorce attorney and a financial advisor. They should understand the complex rules surrounding retirement assets. Do not try to handle the division of these accounts on your own. By being aware of these common divorce outcomes that can erase retirement assets, you can take steps to secure a fair settlement. This will help ensure your financial future remains intact.
What part of dividing assets in a divorce seems the most complicated or unfair to you?
Read more:
Why Divorced Men Are Now Flocking to This One State
Why Elderly Couples Are Quietly Getting Divorced
The post 6 Divorce Outcomes That Can Erase Retirement Assets Overnight appeared first on Budget and the Bees.
