When a couple divorces in Washington, their retirement assets are considered community property. Even if one spouse earned all of the money in a 401(k) or pension, the law presumes that the couple shares these assets. While the law calls for equitable distribution of all community property, it is important to work with an attorney throughout the process to ensure that your rights and interests are protected.
FOXBusiness.com recently interviewed a family law attorney on the complex process of dividing retirement assets, the importance of qualified domestic relations orders (QDROs), and the following three common and costly mistakes.
Not considering the tax ramifications
Earlier this year, we posted on the topic of QDROs, which allow a spouse to transfer retirement benefits to the other spouse without significant tax penalties. But, what happens if you don't have a QDRO? Let's say one spouse just decides to take out a portion of a 401(k) and give it to the other spouse. In this scenario, the account owner will pay 20% of the distribution in federal taxes. Additionally, the distribution will increase the account owner's taxable income, so he or she will end up paying more taxes on their entire income for the year.
Not accounting for investment gains or losses
Retirement accounts and pension plans must be properly valued in order for a fair and equitable division. A valuation should include an appraisal of the present value of a retirement account, as well as predicted gains and losses based on when the spouses will retire. This can be done through performance calculations by plan administrators.
Not choosing a method for dividing a state pension plan
Corporate pensions are typically considered qualified retirement assets and can be included in a QDRO. However, Washington State pensions must be divided according to a special property division order that can either split the account into two separate accounts at the time of the divorce or award an interest to one spouse at the time of retirement. If you do not choose a method, the court will choose one for you.
The key takeaway is to make sure you understand every step of the process so you can retain control over the final outcome. Our attorneys will answer your questions, explain the process and work to obtain the best possible results.