With divorce rates steadily increasing for those over 50, the prospect of divorce adds a new twist to retirement preparation. With children having left the nest, the focus of divorce is no longer on custody issues but on how the estate that has been built during the marriage will be divided as retirement begins.
How Common is a Gray Divorce?
Although divorces in this age group are becoming more common, hence the popular moniker ‘gray divorce,’ they also tend to be more amicable, generally being the result of couples growing apart and seeking the opportunity to redefine happiness outside of the constraints that may have been placed upon them when their children were young.
This amicability doesn’t necessarily make the division of assets clear cut or easy—for example, rules governing the separation of IRAs, retirement plans, and 401(k)s need to be followed, and they’re often tricky. A mistake in division of these assets could cause one partner to be responsible for unforeseen taxes or unintended loss.
In some cases, older couples who have been very successful often have more than one 401(k)s, pensions, and IRAs, and those are very difficult to separate in a way that seems completely equitable. For those who have annuities, the best strategy may be to offer other assets that equal the value of the portion of annuity that the spouse is owed. This avoids penalties for cashing in the annuity.
Unfortunately, couples need to recognize that there will be a loss somewhere, even if every care is taken to preserve the integrity of the estate. Part of this loss will involve retirement plans, which can come as a shock to the spouse who owns this benefit.
Both 401(k)s and pensions require what’s called a Qualified
Domestic Relations Order (QDRO), a decree issued by a judge that lays out what
portion a spouse is owed from the account holder’s plan. The plan administrator uses the QDRO to
transfer the determined amount to the divorcing spouse. Luckily, you will not incur a penalty for
this split thanks to the one-time QDRO exception.
Getting a QDRO is not the only step, however, in splitting a retirement plan. For starters, you’ll need to ensure that your spouse is not repaying a loan through paycheck deductions. Beneficiaries of the plan need to be changed to remove the soon to be ex-spouse. Furthermore, employers have rules about how pensions can be split, and you’ll have to follow their guidelines. Also, determining how much the pension is worth can take several weeks or even months, so it’s not wise to decide how it will be split before you have this information.
When it comes to IRAs, QDROs have no bearing, so you’ll need to set forth expectations in your divorce decree, and this determination will need to be submitted to the IRA custodian. Withdrawals from your IRA aren’t penalty free even if they’re for a divorce, so the only way to avoid a penalty if you’re under 59 ½ years is to roll it directly into another IRA.
Some retirement plans, such as traditional 401(k)s will require that taxes be payed on any distribution, which is not the same as an equivalent dollar amount on a Roth IRA. Most agree the wisest course is to separate Roth IRAs from other retirement assets and then split them down the middle.
Couples with complicated finances should consider a collaborative divorce, where both partners hire their own attorneys, but use a joint financial planner and coach. Both partners state their financial goals, and the planner works to meet both partner’s goals as close as possible. Oftentimes this may appear less “equal,” as one partner may require more liquid assets for immediate large purchases, and another may want to preserve investments.
Basically, each couple will need to determine how they distribute their retirement income with equity in mind, but then make sure to consult appropriate professionals to make sure not to lose investment value due to constraints of retirement plans or special accounts.