Divorce Tip #7: Dividing Retirement Accounts in Divorce.
Dividing retirement accounts in divorce can be tricky. Find out how it will impact your whole financial picture and taxes before you say ‘YES’. Divorce retirement expert and mediator Denisa Tova cautions what you need to know.
Every state has its own rules for dividing pensions in divorce. In most states you would be entitled to some portion of the pension that your spouse earned during the marriage. But this is an extraordinarily complex area and I strongly recommend that you consult with a professional. You want to avoid a nightmare scenario where you forget to negotiate to remain as the survivor beneficiary upon your spouse’s retirement, and he/she elects his/her new spouse and you are a toast. Government pensions have even stricter rules when it comes to survivor benefits! The same goes for a 401K plan, for an example.
The other issue to watch out for is a common scenario of trading a share in home equity for a share in a retirement account, like a 401(k). It may appear to be an equal trade but not necessarily. One of you might have to pay taxes and possibly penalties, which will shrink the share and make it hardly an equal split. The bottom line is to make yourself informed and understand how different option will impact your finances and taxes after divorce.
You can find an entire chapter devoted to how to split up retirement accounts fairly in my Free e-book The Bedroom Elephant: A Guide to Successful Divorce.
Divorce Mediator, Denisa Tova, CFP, CDFA, helps couples divide finances rationally and prepare practical parenting plans. Denisa is also a retirement valuation specialist. She consults US and UK attorneys in the area of valuation and division of retirement assets and she is a frequent speaker on the topic.