Managing Your 401(k) in Your Illinois Divorce
Nearly all financial aspects of divorce are complex, but few are quite as confusing and consequential as the 401(k) retirement plans. Unlike other assets, these accounts often lead to costly penalties when dividing them, and those who dip into them to fund the actual divorce often find themselves in even more financial trouble. Learn how to effectively divide your retirement plan in divorce, and how the assistance of an attorney can mitigate the risks.
The Complexities of QDROs
Qualified domestic relations orders, or QDROs, are used to divide retirement and pension plans in divorce. They are also exasperating and frustrating for those who do not know how to handle them. This is especially true when the QDRO is handled by a third party. Additional fees can be added when things do not go smoothly (such as failing to follow a third party’s outlined instructions)—sometimes two to three times more than what the divorcing parties might have otherwise paid
It is the strict requirements of such third-party handlers and the risk of paying ridiculously inflated fees that should be heeded most by divorcees. Yet many end up paying them because their advocate was not well-versed in how to effectively handle the plan. Worse yet is when divorcees attempt to handle the process on their own
Using Retirement Money to Fund Your Divorce
If you are going to attempt to use retirement money to fund a divorce, then a QDRO may not apply. Yet this is one financial move that is often advised against since there may be excessive tax penalties. Further, by using their 401(k) to pay for the divorce, divorcing parties stand to lose a rather large chunk—if not all—of their retirement money. For those nearing retirement age, this can be a serious and costly mistake
Finding Alternative Solutions
First and foremost, divorcing couples should avoid using their retirement money to pay for the divorce. Start with selling non-liquid assets that are no longer needed, consider selling the family home before filing, or even save up for the legal process before moving forward. Second, when it comes to deciding whether or not to split the 401(k), consider alternative options, such as buying out the other spouse with other assets. Lastly, ensure that your attorney is experienced in handling QDROs in divorce and that they are familiar with the process
Source:
http://gazette.com/the-divorce-penalty-a-401k-fee-can-add-insult-to-injury/article/1596005
