Meridian Blog

One of the most wonderful parts of my job is getting to celebrate so many positive life-changing moments with our clients like graduations, marriages, babies, new dogs, long-awaited retirements, the list goes on. While it’s wonderful to get the chance to celebrate these alongside our clients, we also recognize we play a very vital role in the not-so-happy life-changing moments as these tend to be some of the bigger transitionary periods in life. It is hugely important that our clients know we are right alongside them through the ups and the downs and everything in between.

Asset Splitting in Divorce and Navigating QDROs

Divorce is rarely simple, and when it comes to dividing marital assets, things can get even more complex. Assets include everything from bank accounts, non-retirement investments, retirement funds, stock options plans, real estate, and whole-life policies. The primary goal is to achieve a fair distribution, but fairness can be subjective and depends on various factors including the length of the marriage, each spouse’s contributions, and state laws.

State divorce property rules fall into two categories:

1. Equitable Distribution – assets are divided fairly but not necessarily equally. Factors such as the length of the marriage, each spouse’s financial contributions, and future needs are considered.
2. Community Property – all property accumulated by partners during marriage is typically considered community property and is divided equally between spouses upon divorce.

Outside of state rules, assets can be divided between marital assets (i.e. – assets acquired during marriage) and separate assets (assets acquired before marriage or through inheritance/gifts specifically intended for one spouse).

During the process of splitting assets and how to fairly divide assets, remember that some accounts get a different tax treatment than others. That can make accounts that are otherwise equal in value, more or less “valuable” after taxes are considered. Funds in a Roth IRA may be seen as more “valuable” since qualified distributions are tax-free (aka more money in your pocket) unlike qualified distributions from a Traditional IRA which are taxed at income tax rates (less money in your pocket).

When it comes to employer-sponsored retirement plans, one key tool in the dividing process is the Qualified Domestic Relations Order, or QDRO.

A QDRO is a legal order issued by a court that outlines how to divide certain types of employer-sponsored retirement plans such as a 401k, 403b, or pension during a divorce. It’s essential to ensure that retirement benefits are split according to the terms agreed upon in the divorce settlement or stipulated in a divorce decree.

In essence, a QDRO provides a mechanism for dividing and distributing retirement plan benefits between divorcing spouses. This order is crucial because it allows for the direct transfer of retirement funds from one spouse’s account to the other, without triggering taxes or early withdrawal penalties.

Why Do You Need a QDRO?

Without a QDRO, a retirement plan administrator generally won’t recognize the terms of the divorce settlement regarding the division of retirement benefits. This means that even if you and your ex-spouse agree to split a 401(k) or pension, the plan provider won’t enforce that agreement without a properly executed QDRO. This could lead to delays and complications in accessing your share of the retirement funds.

Types of Retirement Plans and QDROs

1. Defined Benefit Plans: These provide a set monthly benefit at retirement, often based on salary and years of service. The QDRO will specify how much of the monthly benefit will be allocated to the non-employee spouse.
2. Defined Contribution Plans: These include 401(k)s, 403(b)s, and other similar plans where the amount in the account depends on contributions and investment performance. A QDRO will typically specify the percentage or dollar amount of the account balance to be transferred.
3. IRA Accounts: Although IRAs are not covered by QDROs, they can still be divided using a similar process called an IRA transfer. The key is ensuring that the division is done in a way that avoids taxes and penalties.

Separating financial assets during a divorce is a challenging process, but with the appropriate team of professionals, careful preparation, and strategic planning, it can be navigated effectively.

While dividing financial assets is a crucial part of the divorce process, it’s also important to focus on your overall well-being and future. A fair and well-considered division of assets can set the stage for a more stable and secure post-divorce life, allowing you to move forward with greater peace of mind.

On a lighter note, when it comes to our kids helping out with chores, we tend to be more of an equitable distribution type of household, but not sure if we got it quite right ….