How To Divide Retirement Accounts in a Divorce

When divorcing, retirement accounts are often divided between the parties. In all cases where a retirement account needs to be divided, some type of affirmative action after the divorce is required to do so. Unless there are unusual circumstances or the parties agree otherwise, the account holder should NOT be required to cash out or liquidate his or her retirement account, either in whole or in part, to pay the other party what they are entitled to.

Many people make the mistake of assuming that this division will happen automatically, especially if they do not have an attorney. This is absolutely not the case. There are situations where, years later, the account holder retires and the other party wonders why they have not begun receiving payments. In fact, there was a recent case in Minnesota where the Wife lost her rights to the Husband’s pension because she failed to take any action to divide the account after the divorce. (For more information, see article here.)

There are several different types of retirement accounts which are divided in different ways. The most common type of retirement account is a “qualified plan.” The definition of qualified is set forth in federal law. However, these are most commonly the types plans such as 401(k)’s, 403(b)’s, deferred compensation or pensions. In order to divide one of these accounts, there needs to be a special order prepared called a Qualified Domestic Relations Order which is commonly referred to as a “QDRO.”

The processing of a QDRO can be complicated and lengthy. Essentially, a QDRO is prepared by an attorney or an outside firm who is hired for same. In Wisconsin, attorneys rarely prepare QDRO’s and usually hire an outside financial firm to do so. The QDRO is often sent to the plan first for pre-approval. Eventually, either before or after this pre-approval process, the QDRO is sent to the court for signature. Once the court signs the QDRO, a certified copy of this QDRO is required and then sent to the Plan for processing. The cost of the preparation of the QDRO is usually shared equally, at least in Wisconsin.

There are other plans which are non-qualified but which can also be or must also be divided by QDRO or by a different type of Order prepared separately from your judgment of divorce. Most often, for example, this applies to a TSP, FERS or other government retirement account.

Retirement accounts such as IRA’s, Roth IRA’s or annuities can often be divided without a QDRO. Typically, just the judgment of divorce and an internal form signed by the account holder is all that is necessary. The account holder should contact his or her Plan to determine what is required in these cases.

When a retirement plan is divided properly, there are no tax consequences or penalties to either party. Further, the receiving party is not dependent on the plan holder to pay him or her any monies that they are entitled to receive.

If you are divorcing or have divorced, it is imperative that you take all necessary steps to divide any retirement accounts awarded to you. If you don’t have an attorney and don’t know how to do this, it is well worth your time and money to hire an experienced divorce attorney to assist you with the division. If you do have an attorney, make sure that the division is done after the divorce. If not, you need to follow up with your attorney or hire another attorney to do so. Ultimately, it is your responsibility to make sure you that you receive what you are entitled to pursuant to the judgment of divorce.

If you are already divorced, it still may not be too late to divide a retirement account if this has not already been done.  However, the longer you wait, the more likely it is that there will be problems or that you could lose your rights altogether.  Contact an attorney immediately if you find yourself in this situation.

If you have any questions or concerns or need assistance in dividing a retirement account, please contact Nelson, Krueger & Millenbach, LLC (formerly Nelson & Davis, LLC) at 414-258-1644 to schedule a free initial consultation