What happens to my pension in a divorce?

After years working hard and saving for retirement, the prospect of having those funds suddenly cut in half worries many people. But with more and more people ending their marriages later in life, division of retirement funds becomes a common negotiation point in divorce.

Thinking of getting a divorce, or already started divorce proceedings? If you possess significant retirement assets, creating a plan for dividing those assets saves a lot of headaches. In many situations, you won't be able to hold on to all of your pension in divorce. But agreements like a QDRO can help ensure everyone is treated fairly.

Plan on sharing your pension

Most people know that, in a divorce, spouses divide property obtained during the marriage ("marital property"). Indiana is not a "community property" state, meaning the division is not required to be 50/50 but, rather, will be whatever the court finds is fair and equitable

But, many people fail to realize retirement accounts are also subject to division as marital property. Even if only one name is on the account, a pension or other retirement account may belong to both spouses. In these cases, property division negotiations include a QDRO to deal with division of pensions.

What is a QDRO?

A Qualified Domestic Relations Order (QDRO) lays out how someone other than the named payee on the account accesses funds from a 401(k), 403(b) or pension. Ideally, they ensure that an ex-spouse, child or another dependent who rely on those funds are in a stable financial position following the divorce.

If you have retirement funds at the time of your divorce, obtaining one of these orders helps avoid problems down the line. It details exactly to distribute a specific retirement fund, and to whom. It also allows for withdrawal from one of these accounts any time, without the early withdrawal penalty fee that would normally apply. 

However, keep in mind that QDRO's are not used for Individual Retirement Accounts (IRAs). Those accounts are usually the property of only the named individual unless you put some of the earnings you made during the marriage into your IRA. In that case, your spouse gains some of those funds. 

If you hold a significant pension or retirement account, having a plan in place for those funds spares you from more fights in the future. It may be hard to share something you’ve worked hard for, but with the right strategy you can ensure your finances are protected in divorce.

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