Couples who have recently finalized their divorce and divided up assets are understandably eager to move on to the next phase of their lives. But closing the book too hastily on your previous relationship could result in some unintended financial consequences.
If you have recently parted ways with your spouse, here are five important steps you need to take to protect your assets and shore up your retirement plan:
1. Make sure the retirement plans are divided according to the divorce agreement.
Regardless of your will at the time of your death, your ex-spouse will inherit the money if he or she is the named beneficiary on your account.
The IRS requires a QDRO (Qualified Domestic Relations Order) in order to divide money in a retirement plan between two parties. A QDRO is a court-ordered document that specifies how the assets will be divided. In many cases, you must also provide this order to your retirement plan provider, and follow up with them to make sure the document has been received and processed.
If you are eligible to have your share of those assets deposited into your retirement plan, be aware that there is a one-time opportunity for a divorced spouse (under age 59 ½) to withdraw money from an ex-spouse’s retirement plan without paying a 10 percent Internal Revenue Service penalty.
So, if you’re under 59 ½ and need a portion of your ex-spouse’s retirement savings to pay some immediate expenses, you may want to pull that money out before you roll the funds into your own retirement plan. You will have to pay taxes on that transaction, but you will avoid the 10 percent penalty. You may want to discuss with a financial adviser how the withdrawal could impact your long-term savings goals.
2. Change the beneficiary designations on your retirement accounts. Even if you’ve had a new will drawn up due to the divorce, you still need to change the beneficiary designations on each of your retirement accounts. People often neglect this step because they think their will supersedes all other documentation. In reality, the opposite is true.
A beneficiary designation is a legally binding document, and regardless of your relationship status or the contents of your will at the time of your death, your ex-spouse will inherit the money if he or she is the named beneficiary on your account. Even if your ex decides to honor your wishes and, for example, turn the money over to your children, there may be complicated tax consequences if you neglected to change your beneficiary.
3. Review your Social Security options. If you have been married more than 10 years before the divorce, you may be eligible for half of your spouse’s Social Security benefits. Get an estimate of your ex’s Social Security benefits and compare them to yours, because you can’t claim both.
Also, be aware that if you remarry prior to age 60, you will not be eligible to collect Social Security based on your ex-spouse’s work record. If he or she remarries, however, that does not impact your eligibility.
4. Reassess your investment allocation. Consider your own risk tolerance when it comes to investing. Often, a divorced person finds that their investment portfolio’s asset allocation is more in line with their ex-spouse’s risk tolerance than his or her own. Make changes to your investment mix based on what’s appropriate and tolerable for you given your current savings level, profession and personality.
5. Review and re-establish your retirement savings goals. Post-divorce is an apt time to estimate what your needs will be in retirement and then set your goals accordingly.
Establish a new financial plan based on retirement expenses for one, rather than a couple. Make regular contributions to your retirement plan a priority.
The Bottom Line for Your Bottom Line
Divorce is an emotional, life-altering event, and it’s understandable to want to put the past behind you. Before you set off on your new path to a long and happy retirement, though, make sure you take the time to get your house in order and position yourself for financial security in the future.