Financial Restrictions on Retirement Age After Divorce

Financial Restrictions on Retirement Age After Divorce

Posted on August 13th, 2018

For the state of Nevada, retirement, pensions, 401ks, IRAs, and other assets are considered community property. This means that each spouse is entitled to half of each other’s retirement benefits that were accrued during the marriage, but in order to divide those retirement accounts you have to go through a Qualified Domestic Relations Order (generally referred to as a QDRO).  IRAS may be divided post divorce without a QDRO if no financial calculations are necessary. Another IRA must be opened to roll the portion of the IRA to, subject to written instructions to the IRA custodian. Any portion of the retirement plan earned before marriage is separate property and is returned to the spouse who earned the retirement prior to marriage. If you have saved all your retirement plan statements your rate of return can be calculated and this could be returned to you as well. 

The QDRO is a legal document that establishes your ex-spouse as an “alternate payee” which is an individual other than you who can receive payment from your pension plan.  Once your divorce decree orders the division, the process of legally splitting your 401k can begin. You or your attorney will draw up the QDRO which tells the administrator of your 401k how to split it to comply with the Employee Retirement Income Security Act. The family court judge must then approve and sign the QDRO, and the plan administrator has to approve it as well to ensure it aligns with any federal government liabilities.

When it comes time to distribute the 401k, your spouse has three options for collecting their portion:

  • The proceeds can be rolled into their own retirement plan.
  • They can take their payments when you retire, which leaves their share intact with your existing plan.
  • They can take the money as a cash payment.

The QDRO must state the method your spouse is choosing to collect their portion so the plan administrator knows how to proceed. It’s important to note that taking their portion of the 401k as a cash payment is a one-time option for your spouse at the time that the plan administrator approves the QDRO. If they choose not to take the cash payment, your spouse will be subject to a 10 percent penalty for early withdrawal unless they are over the age of 59 ½. The IRS will treat the distribution as regular income when they cash it in, meaning they would be liable for income tax on the amount, regardless of age.

The division of assets does not apply to Social Security benefits, however. Social Security retirement benefits are federal and aren’t considered marital assets that can be divided in a divorce because a state judge does not have the authority. You can continue to receive social security benefits from your ex-spouse’s record if you meet the following:

  • You are 62 years or older
  • You and your ex-spouse were married for 10 or more years
  • You are unmarried (although your ex-spouse can be remarried)
  • The benefits from your own work are less than the benefits you would receive from your ex-spouse’s work

Regardless of the situation, it’s always wise to consult with an attorney before you begin the process of dividing assets to ensure that no step or detail is missed, and everything is allocated properly. For a personal consultation, call us today at 775.420.4221.