What is in this article?:
- Avoid Five Costly Mistakes in Dividing Retirement Assets During Divorce
- Five Issues
Addressing these issues at the outset can prevent future litigation
From a wealth management standpoint, the most critical component of property division in divorce is the careful handling of qualified and non-qualified retirement assets. Too often, couples simply slice traditional retirement assets down the middle, but a more thoughtful approach proactively considers the realities of post-divorce needs and analyzes the long-term benefits imbedded in the assets subject to division (especially in the context of high-net-worth (HNW) estates. Marshalling these improved outcomes requires a working knowledge of the legal parameters for dividing Employee Retirement Income Security Act (ERISA)-qualified retirement assets and other non-qualified assets.
The vast majority of all private-sector retirement plans in the United States are designed and maintained to qualify for favorable tax treatment through compliance with ERISA by which: 1) employers may deduct contributions made to the plan; 2) employees may defer tax liability for contributions to the plan; and 3) the funds held in the plan grow tax-free until withdrawn by the plan participant.
To maintain the integrity of these federally regulated and tremendously valuable tax benefits, federal law doesn’t permit a plan participant in an ERISA-qualified plan to make early withdrawals of plan assets without penalty.
Exception: Assets held in qualified retirement plans may be divided without penalty for purposes of child support, alimony and equitable division of marital property through the use of a domestic relations order which, once accepted—or “qualified”—by the qualified plan’s administrator, is known as a qualified domestic relations order (QDRO).
QDROs are required to divide assets held in ERISA-qualified plans in connection with divorce, but aren’t required to divide individual retirement accounts or other non-qualified plans, such as deferred compensation plans, supplemental pension plans, long-term incentive plans or stock ownership plans.