Deciding How to Divide Pension Plans, 401(k)'s, and IRA's
With the exception of a home, pension plans and retirement savings such as IRA's, 401(k) or 403(b) plans are usually the most valuable assets involved in a divorce. Tax repercussions can be harsh for early dipping into these funds. However, there are federal provisions that help spouses to divide these retirement plans and avoid tax penalties.
A QDRO allows a state court to split any qualifying benefit plan or pension plan between spouses.
Qualified Domestic Relations Order
A Qualified Domestic Relations Order (QDRO) is a legal tool derived from the Employment Retirement Income Security Act of 1974 (ERISA). It allows a state court to split any qualifying benefit plan or pension plan between spouses.
In order for a QDRO to go into effect during a divorce, it must contain general identity information about you and your spouse. This can include your dates of birth, social security numbers, and addresses. The QDRO also requires guideline information for the benefit plan in question. This is especially important because the QDRO cannot go into effect without a specific outline in the plan's guidelines.
Read more on What You Need to Know about QDROs.
In place of a QDRO arrangement, some spouses opt to evaluate a pension plan and allocate matching assets so the plan can remain in the other spouse's possession. For example, a 401(k) plan can be evaluated based on its stock holdings on a given date, making it easy to define equivalent asset contribution plans.
However, there are some situations where a more involved process is required to determine the total value of a retirement asset. A defined-benefit plan is designed to pay out a certain sum of money from the start of retirement until the beneficiary's death. It is almost always necessary to involve an expert in order to receive an accurate evaluation of this type of plan. Calculations involving life expectancy and the rate of return of the plan's assets are then used to arrive at the current evaluation.
Financial concerns in your divorce are not made easier when things need to be divided. The team at Dishon & Block guarantees you'll understand the property division process and get what you deserve from your ex-spouse.
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California Divorce Guide