In Maryland, divorce is a common issue, but few people are aware of all of the financial implications of a divorce. It can get much more complicated than just deciding who gets the house. One particularly difficult topic is working out what happens to retirement accounts like 401ks.
Divorce and Retirement Accounts
A retirement account is valuable because it lets you invest with special tax benefits. However, those same benefits make the accounts a lot harder to manage in a divorce than other financial assets. It’s not as easy as just splitting the account or cashing it out and sharing the money– that will incur a big tax hit and reduce future gains, and it may also be against plan rules. One spouse could give the other cash and other assets in exchange for holding the account themselves, but this compensation also needs to account for future gains, which can make the compensation quite large.
One approach is to get a QDRO, or qualified domestic relations order. This is a legal order that allows for special transfers of rights to retirement assets and provides a tax shield as long as the assets wind up in an IRA, rather than going to personal spending. Getting a QDRO can itself be expensive, but it is a crucial step in avoiding a major financial penalty when working with a retirement account.
It might cost more to add on a QDRO to divorce, but it actually saves a lot of money in the long run by properly controlling custody of the retirement accounts in question and saves time on future tax filings.