How to keep your retirement intact during a divorce

Divorce is known to impact every part of a person's life. The emotional and financial losses for Connecticut couples can be great, but there are ways to minimize some of the loss with the right planning, knowledge and decision making. When it comes to dividing retirement accounts in a divorce, there are some very specific guidelines that, if followed, can prevent tremendous loss for one or both parties.

The valuation process and method

When dividing any financial asset including a pension fund or retirement account, it is generally best to state the property division in terms of the percentage of the funds or value that each spouse shall receive, not the dollar amount. This is especially critical for items that are subject to fluctuations in value.

For example, assume your 401K is valued on a specific date at $80,000 and you and your soon-to-be-ex-spouse agreed to each receive $40,000 from the distribution. Now fast forward to the date after your divorce decree is recorded, or the date you agree to value the marital assets, and that market conditions now render your account worth only $40,000.

If this happens, you may still be legally required to pay your spouse his or her designated $40,000 which means you receive nothing. The simple act of designating divisions in percentages can make all the difference.

Watch the calendar

Distributions from pensions or other retirement-specific investment accounts must be done within very specific timelines. If not, the IRS or state department of revenue will look upon the transfer of funds as a way to obtain the money before you are truly due to receive it and you will be presented with some hefty tax and penalty bills, essentially evaporating a good portion of your investment.

QRDO avoids confusion

While some funds transfers require the use of a Qualified Domestic Relations Order, these orders can be used for many pensions and retirement funds. Doing so makes it even clearer to tax agencies that your transactions are in fact part of your divorce settlement, helping you to avoid penalties and taxes.

With the amount of emotional challenges and financial costs inherent in a divorce, taking the time and care to avoid the unnecessary ones can make a big difference for both spouses during the process and years later. Working with an experienced attorney is always advised so that you have your best opportunity to protect your future income.