Tag Archive for: dividing retirement funds

Handling financial affairs during a Pennsylvania gray divorce

Older couples often have valuable assets, complex property and little time to change retirement plans, making fair settlements crucial in gray divorces.

The phenomenon of “gray divorce,” or divorce after age 50, has become increasingly common in the last decade. The proportion of people divorcing after 50 increased from 10 percent to 28 percent from 1990 to 2010, according to the New York Times. Today, the number of divorced people older than 50 has outstripped the number of widowed people in the same age group.

There is no denying that divorce is a complicated process at any age. However, people preparing to divorce after age 50 in Langhorne, Pennsylvania, should expect to navigate some especially challenging financial issues.

DIVIDING COMPLEX ASSETS

One issue older couples often face is the division of complex assets, according to Forbes. Older individuals have had more time to accumulate personal assets, and couples in longer-lived marriages may have built up substantial marital assets, such as homes, retirement accounts and other savings. Inheritances from parents and other relatives can complicate matters as well, as the distinction between marital and separate property can be difficult to define.

Spouses can work together to decide how assets will be divided, but usually, spouses can reach a fairer division by seeking legal guidance, since many people do not understand their rights during property division. For instance, many individuals do not realize they may be entitled to part of a spouse’s retirement accounts, including 401(k)s, pension plans or IRAs, if contributions were made to those accounts during the marriage.

Many assets can be divided by agreement or court order, but some assets cannot be distributed this way. For example, retirement plans can only be divided with a Qualified Domestic Relations Order. It is beneficial for older couples to seek legal help when they divorce, to ensure that a fair settlement is awarded and that all court orders and documents are in order. Otherwise, spouses run the risk of losing financial solvency following the separation.

PLANNING FOR RETIREMENT

Another significant issue with divorcing later in life is that both spouses are near retirement, leaving little time to rebuild savings. Typically, even people who were on track to enjoy a comfortable retirement together may not have enough saved to fund two retirements. Separate retirements can cost 30 to 50 percent more than retiring as a couple would, according to USA Today.

Couples should remember that expenses associated with everything from housing to travel to in-home assistance double after a divorce. In light of these increases, many couples ultimately must choose between three options:

  • Staying in the workforce and postponing retirement.
  • Re-entering the workforce.
  • Retiring on track, but with significantly different expectations.

Individuals facing these issues can benefit from hiring a financial advisor before the divorce is complete, so they can realistically evaluate what they will need to survive independently. The sooner spouses evaluate their financial needs, the better they will be able to communicate those needs during mediation or court proceedings.

Anyone preparing for divorce later in life should strongly consider meeting with an attorney. An attorney can advise an individual on legal rights and help him or her reach a settlement that will reduce the financial impact of the divorce.

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Divorce and Your Retirement

As a family lawyer for Bucks and Montgomery County, we help clients just like you through the complicated process of divorce. When clients walk in our door, they are usually very concerned about paying and receiving alimony and child support and then working out a schedule for their children.  During the initial meetings and discussions, we remind them of the importance of looking down the road a few years to retirement.

 

Divorce is as much about your future as it is about your past and present. And retirement funds and benefits are a critical component of your financial future. Whether you are trying to protect your retirement accounts, or collect from your spouse’s retirement accounts, dealing with these funds is as important as it is complex.

 

For many people, retirement accounts and benefits are one of their most valuable assets. In a divorce, these funds are considered marital property and are subject to division. Retirement funds can include 401k money, investment funds, IRAs, and pensions.  Social Security is a benefit and not an asset that is distributed in a divorce but may be considered income for purposes of support. With short and long-term implications for both parties, it is essential to understand the laws and your rights when it comes to divorce and retirement funds. Here are a few points to keep in mind.

 

Understand how retirement funds are divided

An ex-spouse is entitled to a percentage of the amount of retirement earned during the marriage.  If a spouse has been working for 20 years, and the marriage lasted for the last 12 of those years, the ex-spouse is only entitled to retirement funds deposited and interest earned during those 12 years, not earnings or investment made prior to the marriage or after separation.  Also, since oftentimes the spouse is still working, it is unknown how many years of work they will have. A fraction, known as a coverture fraction, is a formula often used to determine what the percentage will be at retirement. The numerator is the number of years married and the denominator is the total number of years accumulated in the plan (usually TBD).  The percentage the court awards is multiplied by the fraction and the amount of the plan or the dollar benefit to determine what the spouse, called the “Alternate Payee” will receive. It is also important to determine if there are any beneficiary options and whether the spouse will be a beneficiary and whether it has marital value.

 

How are your retirement funds divided after divorce?  

If your or your spouse’s 401(k) or employer-sponsored retirement accounts will be divided, you need to let the plan administrator know as soon as possible. They will be able to tell you the value of the retirement account on the date of marriage and the value upon divorce – again, this is the part of the retirement account subject to division.  

 

If you are going to be dividing retirement assets, in many cases, you will need to obtain a Qualified Domestic Relations Order (QDRO), which is separate from your divorce decree. It will be signed by a judge and will instruct the employer to separate the retirement account into two accounts. This order will allow retirement funds to be withdrawn from the retirement account without penalty and deposited into a separate account for the non-employee. It is important to note that QDROs are not needed when the retirement plan is an IRA and in other types of plans will be a DRO similar to a QDRO.  It is best to hire an expert to draft a QDRO who is familiar with the rules and regulations and plans involved. The cost to draft it is typically around $600 per QDRO and the parties normally share that cost. You may want to check if your plan, however, imposes any of their own fees.

 

Consider Alternatives

In some situations, the parties may negotiate a settlement that avoids the splitting of retirement funds. For example, one spouse may offer the other a buy-out such as stocks, bonds, investments, or property of equitable value in exchange for keeping all of their retirement funds intact. In order to do this, however, you must know the dollar value of the marital portion of the retirement plan. In pensions, this will require an appraisal.  In 401(k) plans you will need all the statements after separation as well the statement at the time of separation in order to determine what is marital.

 

Get Professional Help

A qualified attorney will know your rights in regard to protecting or collecting retirement benefits and funds. A certified accountant can help you explore the short-term tax implications and long-term financial ramifications of dividing retirement funds.

 

Divorce presents an incredible challenge – making decisions that have far-reaching impacts at a time when you are the most emotionally and mentally stressed. Allowing a compassionate professional to provide guidance can help ensure not only a brighter future but a more financially secure one as well.

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