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How will divorce affect my retirement savings?

According to the American Psychological Association, 50% of marriages in the United States end in divorce. Though the process is not uncommon, it is still often a delicate and difficult situation. While there are certainly personal concerns, such as parenting and heartbreak, the financial implications of splitting up with your partner are of great concern as well. According to divorce attorney’s, retirement savings are one of the most contentious issues regarding divorce.

Because Oregon is an equitable distribution state, the courts will try to divide the communal nest egg as fairly as possible. However, this does not necessarily mean that your retirement plan will always remain untouched.

Separate but not equal retirement savings

Just because you and your spouse have separate retirement plans does not necessarily mean you will be able to walk away with your own respective retirement plans completely untouched. If you have a larger nest egg, either because you make more income, or because your spouse re-entered the work force later after child care, your spouse may still have a right to a portion of your retirement.

Generally, courts will consider contributions made to retirement plans after your marriage as shared assets. Thus, retirement funds, like any shared asset will be divvyed up based on what the court finds fair for your particular situation.

Transferring Funds

Once you and your spouse figure out what is equitable, you will put a plan in place for distributing the assets. However, retirement plans are a notoriously difficult asset to divide, because of the rules associated with their liquidity.

For employer-sponsored retirement plans such as a 401(k) or a pension, funds are transferred from the holding spouse to the non-employee spouse through a Qualified Domestic Relation Order (QDRO). This kind of decree, when executed properly, will allow the transfer of funds from an owner to their ex-spouse without subjection to taxes. These decrees can vary from one-time lump-sum payments to periodic transfer plans.

For retirement plans that aren’t employer-sponsored, an IRA custodian will transfer the funds based on the divorce agreement instead of a QDRO. However, you must be sure that your divorce agreement properly identifies that the IRA will be going through a proper transfer incident. Otherwise you may be forced to pay taxes on the assets that were transferred from your account.

Final word

The division of the retirement pot is one of the most contentious aspects of a divorce. There are many options for handling the equitable distribution of marital property. Every situation is different with regards to the relationship between spouses and their personal finances. Make sure you work with your attorney to understand all your options and that any solution you come up with is executed properly.

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