Divorce and Retirement

When divorce happens, one of the trickiest issues is how to divide retirement plan assets.

For example, money should not simply be taken from the account holder's plan and given to his or her ex-spouse. Doing it wrong may have grave tax consequences for the account holder.

There a number of things that should happen first. Here is the short version:

1. A written agreement must be in place.
2. The divorce should be final.
3. The money transfer should happen according to a court order, as per the divorce agreement.

All well and good, but what kind of agreement and what should the agreement contain?

That is the kicker. The type of agreement written up depends on the type of retirement plan a person has. Use the wrong agreement, and it's a blown deal tax wise. Although people do sometimes blow it, it's really not that hard to get the right kind of agreement in general terms. However, there are still many details that can cause problems.

The type of retirement plan also determines for some things, what can be in the agreement and how it might be split. For instance, can the money split happen as soon as the divorce is final, or will it have to wait until the account holder retires? In some plans, benefits are not available to the ex until when the account owner reaches the earliest retirement age. If a pension, ex-spouse may only get a share of it at the same time when account holder starts receiving the benefit at retirement.

Other details are: Do you choose a specific dollar amount or a percent? Was there money in the retirement plan before the marriage started?

In some cases money is not split, but instead for example, the account holder may keep the whole amount, and the ex gets the house in exchange. However, if not handled correctly, the value of one asset can plummet or rise much more than the other in between the time of agreeing upon such a settlement and the actual point of transfer.