Divorce is full of emotional turmoil. Those who find themselves in the midst of this process may be surprised at how complex it can be. The property division portion of the divorce alone is full of hurdles that must be carefully navigated. One misstep can cause your future finances to take a tumble.
This is particularly true when it comes to splitting retirement assets. Three specific hurdles to watch out for that can lead to unfavorable financial repercussions include:
- Unintended beneficiaries
- Financial penalties for early distribution
- Inability to receive payment because of missing paperwork
Simple awareness of these issues is half the battle. Having a better understanding of the effects can help you structure a divorce settlement that is less likely to cause future financial issues.
Update beneficiary designations
Various accounts use beneficiary designations to guide distribution. Accounts like life insurance policies, bank accounts and some retirement accounts are controlled by these designations. After the divorce is complete, it is wise to take a moment to review these designations and update them if they no longer reflect your wishes.
A failure to do so can result in an ex receiving the distribution.
Avoiding getting the retirement asset division deemed an early distribution
When splitting accounts like IRAs, it is important to tread carefully. A failure to follow proper protocol can result in an early distribution classification which can result in penalties.
A recent report by Forbes dug into this issue, noting an early distribution classification can be avoided by taking steps to make sure the transfer is "incident to divorce." One step is to label the transfer with the term "incident to divorce." It sounds simple, but it is a step that can easily be forgotten.
It is also important to complete the process within a year after the divorce is complete.
Make sure you have all needed paperwork
Some accounts require use of a qualified domestic relations order (QDRO). This is a court order that requires the account at issue be split. Without the court order, you may not receive payment from an ex's account or the transfer could be subject to penalties and taxes. The order outlines that you, the alternate payee, are eligible to receive payment.
Another hurdle to be wary of: Getting a divorce without legal representation
These three hurdles are just a sampling of the many that can be encountered when going through a divorce. Divorce isn't just a sprint to the finish, but is more akin to an ultra marathon through the desert. During this emotionally exhausting time, an attorney can advocate for your interests and better ensure a more favorable outcome.