Divorce and Retirement Savings
In addition to the emotional strain and hardship of divorce, the end of a marriage also often results in major financial changes.
Often, substantial amounts of marital assets are tied up in pensions or other retirement funds. If you and your spouse have your own employer-sponsored plans, you may each elect to keep your own. But if you don't have your own retirement savings, you may be able to claim a share of your spouse's. A court-ordered Qualified Domestic Relations Order (QDRO) makes that possible.
A QDRO is a judgment or order formally creating the right of an alternate payee (you) to receive all or some of the benefits payable to a particular retirement plan participant (your spouse). As part of a divorce decree or court-approved property settlement, a state agency or authority, such as a court, can issue a QDRO.
You should keep in mind that QDROs must be issued before the divorce papers are finalized. Remember, too, there are no second chances. A QDRO must be included in your divorce agreement, or you'll probably miss out on your fair share of your spouse's retirement funds.
To get the QDRO process started, you should consult an experienced divorce attorney and have him or her draw up a QDRO as part of, or in addition to, the divorce settlement.
Alternatively, there are online resources that provide step-by-step guidelines to help you prepare a QDRO yourself for court-approved signature. However, because this document will have a significant impact on your financial future and security, and because the court may refuse to accept one that doesn't meet its standards, consulting with an experienced professional is probably the safer approach.
The Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) require that certain information be provided for a domestic relations order to qualify as a QDRO. Here's the basic information you'll need:
- Your spouse's name and mailing address (as the "plan participant") and your name and mailing address (as the "alternate payee")
- The name of each retirement plan to be divided as terms of your divorce
- The dollar amount or percentage (and the method of determining the amount or percentage) of the benefit to be paid to you
- The number of payments or time period covered by the QDRO
In addition, the QDRO must meet the requirements of the retirement plan's QDRO rules and procedures. This plan-specific information will be outlined in the retirement plan document. Be sure to take it, along with the plan summary, when you meet with your attorney. If you don't have access to plan information, call the human resources department at your spouse's employer. Someone will be able to tell you how to contact the retirement plan administrator.
While the plan administrator may not rule on the validity of the QDRO immediately, you can ask that your share of the assets be set aside until the ruling is final. That way, your spouse can't borrow or withdraw those amounts while the QDRO is under review.
While an employer-sponsored retirement plan may be your spouse's largest retirement asset, it isn't the only one you'll want to share in a divorce. Your spouse's individual retirement accounts (IRAs) are also considered marital property if he or she made contributions and accumulated earnings while you were married.
It's easy to forget about retirement assets during emotional times of divorce, especially if retirement isn't in the near future. But by having a clear plan for obtaining your share of those assets, your divorce settlement can be a solid foundation for your future financial security.
Seeking financial security when divorcing is especially crucial for women. This is because two main sources of retirement income—pensions and Social Security—are based on a lifetime of earned income. Since women earn, on average, 24% less than men, and often work fewer years, they can expect to receive less from these sources when they retire.
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