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How divorce impacts retirement accounts

On Behalf of | Aug 3, 2021 | Divorce

Thousands of Iowa residents divorce every year. One of the biggest issues in any split is the division of assets. For most couples, after their primary residence, their retirement accounts are their largest asset. Dividing these can be complicated. The type of retirement financial instrument will also impact the way that it’s divided. For example, 401(k)s are handled differently than pensions.

Qualified domestic relations orders

A QDRO is the order a family court judge uses to let a plan administrator or financial institution know that a pension or 401(k) is being divided. The spouses themselves are unable to change the designations on these instruments to make this happen. It’s usually easier to understand the division of an account like a 401(k), which has a balance. Pension plans work differently. A financial professional is often consulted to figure out what the future benefits are worth in today’s dollars.

Dividing other assets

IRAs are different, because they are designed to be managed by individuals. When dividing an IRA in a divorce proceeding, the account holder will provide a copy of the divorce agreement to the financial institution. Then the account will be divided as outlined in the document. A financial advisor may be able to help you understand what the best way to receive the funds will be. Some individuals want cash, but this can incur taxes. It may be better to have funds transferred to a Roth IRA.

Finally, in some cases it may be possible to agree not to divide a couple’s retirement accounts. For example, in some divorces, someone may decide that they’d be willing to take the house in exchange for not receiving any retirement benefits. Their ex may be willing to accept that, rather than going through the process of selling the house and dividing the proceeds. When it comes to dividing retirement accounts, it’s a good idea to understand what it is that you want going in. Be willing to negotiate for it.