Should I leave my Ex's retirement account as is?

life after divorce retirement accounts in divorce
retirement accounts in divorce

If you are recently divorced and not sure what to do with your ex's retirement account, you are not alone.

It is common for one partner to handle all of the retirement accounts in a marriage. In fact, I get calls all the time from individuals who are extremely frustrated. After they've been divorced for over a year, they still have not moved all the relevant accounts into their own name. There is often a lot of confusion around this issue.

With respect to receiving a portion of an ex's 401(k), here's the first question:

If you are receiving a distribution from a 401(k), has the Qualified Domestic Relations Order (QDRO) been filed?

One of the biggest mistakes that a person can make after a divorce is not following up on the QDRO. I really encourage clients to have the QDRO drafted prior to their final court appearance if at all possible. That way, it can be signed by the Judge and submitted to the plan administrator right away.  Keep in mind each plan has its own QDRO requirements. Get in touch with the plan so you know what is required.

A Qualified Domestic Relations Order (QDRO) is not required for most IRAs and Roth IRAs. However, you will need to submit a transfer form and potentially open a new account (if you don't already have one) to get those investments moved into your name. If you are not sure about the process or the form that's needed, contact the financial institution where the investments are held. It is worth noting that there are some exceptions where a QDRO may be required to divide an IRA. This is why it's important to do your research as you prepare for your divorce. Know what documentation will be required to divide accounts. It is usually easier to get these forms signed as part of the divorce process rather than after the fact.

If the thought of researching these issues on your own is overwhelming, having a Certified Divorce Financial Analyst (CDFA) as your advocate can be very empowering. A CDFA regularly works with clients on transferring assets as a result of divorce and can help you to navigate your financial institution.

Assuming you have already filed your QDRO or you've transferred other retirement assets into your own account and you're now wondering if you should leave your ex's retirement account as is, here's my next question:

What is your goal with these retirement funds?

After your QDRO is accepted by the plan administrator, you will receive a letter asking how you want the funds to be distributed. Options could include maintaining an account at the current firm, rolling it into an Individual Retirement Account (IRA), and/or a cash distribution. As you are deciding what to do with the funds, carefully consider the tax consequences of your selection. I always encourage clients to contact me when they receive the form so I can help them to fill it out correctly. A simple mistake on the form could be extremely costly.

Worse yet, I've seen several people not fill out the form at all. Whether it's because they don't open their mail regularly or they just did not understand the consequences of doing so, the plan may just cut you a check if they do not know how to handle your distribution. If they send you a check, they are required to withhold 20% federal taxes. Depending on the amount of the check and your overall income situation, you could still end up with a substantial tax liability from this distribution. Bottom line, make sure you fill out the form. That way, you are in control of how the funds get distributed to you and you have greater control over the tax consequences.

What is your time horizon?

As you consider what to do with the funds, determine if you have an immediate need for cash. If so, plan accordingly. You will likely be able to do a partial cash distribution from the plan. However, as mentioned previously, you'll want to carefully consider the tax consequences as well as the longer-term financial implications of doing so. If you are taking a cash distribution directly from the 401(k), you may be able to avoid the 10% IRS penalty for early withdrawal if you are under age 59.5 but the distribution is still taxed as ordinary income.

If you plan to keep some or all of the funds invested, what is your time horizon? Do you plan to keep the funds invested for another 10, 20, or 30 years? If so, this should help you to determine an appropriate investment strategy.

What is your tolerance for market volatility?

Your tolerance for market volatility may be significantly different from that of your ex's. If it is, you will likely need to reallocate the assets to more accurately reflect your personal investment objectives. If you don't have any idea how comfortable you are with market volatility, I'm guessing you have not been involved in handling your investments in the past. This is all the more reason to evaluate whether or not the existing strategy is relevant to you.  Working with a trusted financial advisor to help you determine an appropriate investment strategy can help with your confidence if investing is new to you.

Is it possible to keep your share of your ex’s 401(k)?

The short answer is yes but this varies from plan to plan. Check with your specific plan for details. I generally do not recommend it because a 401(k) is designed by the employer for the employees. Non-employee participants do not get the same benefits as employee participants such as the ability to take a loan on the account.

One advantage of keeping the separated account is that you may have access to or be able to keep certain investments that only employees of that company have available to them through the retirement plan. If you would like to remain invested in those shares,  this would be one way to do so.

On the flip side, if you keep the account as it is, you may not have as many investment options as you would if you rolled it into an IRA. Also, rolling the funds into an IRA that is in your name will give you greater control over the funds.

What should you do with your ex's retirement account?

Stop stressing. We recognize that deciding what to do with retirement assets that you have post-divorce is not always simple.  It's a personal decision that is about your financial goals and objectives. Your ex should not influence your decision. I strongly encourage you to consider these assets as part of your overall financial plan. If you are not sure how to transition these assets into your name or you have other questions, contact us. We have helped hundreds of clients smoothly transition their assets. You do not have to go through this alone.

While we are located in Ohio, we have an active virtual presence and work with clients nationwide. Let us help you ease into your transition to financial independence.

 

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