Divorce and property division: What about retirement assets?

Retirement assets require careful consideration during divorce.

Divorce generally results in the division of all marital property, including retirement assets. Regardless of the current value of the retirement asset, this asset is likely to be one of the largest assets anyone owns. It will continue to grow in value and could reach into the millions by the time the beneficiary reaches retirement age.

As a result, it is wise to consider the division of retirement assets on their own merit. Do not simply lump them in with other forms of property. Those going through a divorce should carefully consider the value of the retirement assets that are subject to division and the asset's potential future worth before agreeing to a proposed split.

The following three-step plan can help those going through a divorce better ensure they take the retirement asset into proper consideration before finalizing the divorce.

Step 1: Locate retirement assets

The first step when dividing assets is to locate each account. Retirement assets can come in the form of 401(k)s, pensions, IRAs, money markets, other employer sponsored plans or benefits and other accounts. Those going through a divorce should find the location and current balance of each account.

It is also wise to determine an estimated future value of the accounts to help guide the division discussion. Some plans, like contribution plan assets such as a 401(k), are relatively easy to estimate. Others, like defined benefit plans such as pensions, will likely require an actuary. This is because these plans involve complex calculations with multiple variables.

Step 2: Develop a plan

It is generally wise for each party to the divorce to get a share of retirement assets. Although the benefits are clear for those who are going through a divorce over the age of fifty, even millennials can benefit from keeping some retirement assets after divorce. It is very difficult to rebuild retirement accounts. Even a couple years of savings can build to large amounts before reaching retirement age.

Step 3: Execute

Retirement assets are not like other pieces of tangible property. You cannot just hand over the asset like a piece of jewelry. The parties to the divorce cannot simply state a proposed split of retirement assets and expect the divorce decree to suffice. Some accounts, like 401(k)s and pensions, generally require a special court order to finalize a split. The court order, called a Qualified Domestic Relations Order (QDRO), allows retirement accounts to be split without tax penalties or fees. Other accounts, like IRAs, may require a "transfer incident to divorce."

In order to be valid, the QDRO must generally be approved by the court and the retirement account's plan administrator.

Additional paperwork is likely needed to cover the division of retirement assets that result from military or government pensions.

These steps will help mitigate the risk of surprises regarding retirement assets after the divorce is finalized. However, it is important to note that retirement assets are just one portion of the divorce to take into consideration. As such, it is wise to seek legal counsel to better ensure the divorce proceedings take all factors into consideration before finalizing the split.