Protecting Retirement Benefits During Divorce

Going through a divorce is emotionally and mentally challenging. Amid legal proceedings and personal turmoil, it can be hard to focus on your financial future, but it’s essential. One of the most significant areas to protect is your retirement benefits.

Marital vs. Separate Property: Know the Difference

Before exploring how retirement assets are divided, it’s important to understand how property is classified. In divorce, a judge will distinguish between marital property and separate property:

• Marital property generally includes any contributions made to retirement accounts during the marriage, along with any earnings on those contributions.
• Separate property refers to any funds or earnings added to the account before the date of marriage.

Only marital property is subject to division during divorce proceedings.

Documenting Your Financial Picture: The DRFA

All financial assets must be listed on a Domestic Relations Financial Affidavit (DRFA). This is a detailed document that includes your income, expenses, assets, and debts. The DRFA helps the court determine:

• What assets are marital vs. separate
• Decisions around child support and spousal support
• Attorney fee responsibilities

Tip: Review your DRFA thoroughly before submission. Providing false or incomplete information can harm your credibility and your case.

The Role of a QDRO in Splitting Retirement Plans

After a judge finalizes how assets will be divided, the court issues a Qualified Domestic Relations Order (QDRO). This legal document:

• Makes the division of assets official
• Instructs the plan administrator on how to split the account

You’ll need a QDRO to divide 401(k)s and similar employer-sponsored retirement plans.

How 401(k)s Are Handled in Divorce

Different states have different rules:

• Equitable distribution states divide assets fairly (not always 50/50)
• Community property states typically split marital assets 50/50

If both spouses have comparable 401(k) balances, they may agree to keep their own accounts. But if there’s a large imbalance, a portion may be transferred to the lower-balance spouse’s new or existing account. This can be done through a QDRO by liquidation or direct transfer.

What About IRAs and Roth IRAs?

Unlike 401(k)s, IRAs and Roth IRAs do not require a QDRO. Instead, splits typically fall under the “incident to divorce” rule in the tax code. If completed within one year of the finalized divorce, the transfer of assets is tax-free.

Legal Guidance Matters

While you and your ex-spouse can negotiate how to divide retirement and investment accounts, it often leads to disputes that prolong the process. Working with legal and financial professionals can streamline decisions and help protect your financial future. Also, don’t forget to:

• Close joint accounts (bank accounts, credit cards, etc.)
• Monitor 401(k) activity during proceedings to prevent unauthorized borrowing
• Stay organized to minimize legal fees and avoid unnecessary delays

Protect Your Retirement Benefits and Secure Your Financial Future

Divorce is difficult, but with the right support and planning, you can come out of it financially secure. If you need guidance through the financial side of divorce, the advisors at Wiser Wealth Management are here to help. Reach out today to schedule a consultation and start building a plan that protects your retirement benefits and financial future.

Michaela Dowdy
Financial Advisor, Wiser Wealth Management