When I got divorced more than ten years ago, I was the only divorced woman in my book club.
Now, more than half the women at our monthly get-togethers are divorced or divorcing.
You may have heard how a wave of “grey divorce,” or divorce among 50-somethings, is sweeping the country.
In fact, the divorce rate for Americans ages 50 and over is at record levels. It has actually doubled between 1990 and 2010, according to Professor Susan L. Brown of the National Center for Family & Marriage Research at Bowling Green State University. Back then, only one in 10 Americans ages 50 or over was divorced. Now, it’s one in 4.
Most of the divorced women I know never thought they would find themselves “suddenly single” in their forties or fifties, but here they are.
After years of marriage, it can be hard for women to adjust (and undoubtedly men, too). Most women are worse off financially after a divorce, so it’s important to make the most of the assets you have and stay focused on your financial goals.
We work with people before, during and after a divorce. We’ve observed that the process is a little easier if you understand the mechanics of how assets are divided.
Some of the basics involve splitting retirement assets, like IRAs and 401ks, in a divorce. An experienced attorney can explain the process to you, but many people don’t have the benefit of expert legal advice, so here’s an overview from a financial professional’s perspective:
IRAs are divided via court order. Instructions on how to split IRA accounts should be detailed in your divorce agreement. When handled properly as a “transfer incident to divorce,” the division is tax-free. You simply give instructions detailing how to divide the assets to the custodian or brokerage firm holding the IRA, along with a copy of the divorce settlement agreement.
The custodian then transfers a portion of the assets from Spouse A’s IRA to an IRA account established by Spouse B. This type of “direct transfer” from one account to another avoids tax complications and can be handled from start to finish by the brokerage firm. If you do it incorrectly, you’ll be looking at a big tax bill plus possible tax penalties.
401(k) accounts and other retirement plan are a different story. They are divided by a special document called a QDRO (Qualified Domestic Relations Order, pronounced “Quad-row”). The QDRO is usually drafted by a separate attorney who specializes in this type of document. Employer plans can be quite persnickety about QDROs and how they’re worded, so ideally you want to use an attorney who has dealt with your employer’s retirement plan before and understands their particular rules and guidelines.
Once the QDRO is drafted, it’s sent to the employer’s retirement plan administrator, who proceeds to review the document, approve it, and divide the plan assets into two parts. One part remains in Spouse A’s name, the other part is transferred to Spouse B, the non-employee spouse. Just like IRA transfers, 401(k) plan transfers are tax-free when properly executed. After the division, Spouse B normally has several options, including transferring the funds into his or her own personal IRA free of tax, or withdrawing funds and paying the tax.
Here’s the really important part. To split 401(k) assets, you must use a QDRO. To split IRA assets, you cannot use the QDRO; you detail the division in the divorce agreement. If you don’t follow these rules, you could have a very messy tax situation on your hands, on top of a potentially messy divorce.
To make your divorce as stress-free as possible, make sure to seek experienced legal counsel and qualified financial advice, as well.
Parting Shot: Splitting a non-retirement account, like a joint brokerage account? Piece of cake. Once the percentage division is specified in the marital settlement agreement, your financial advisor can help you divide the assets. No other special documents are normally required.