How Does CT’s Equitable Distribution Law Affect Your 401(k)?
For many mature Connecticut couples, the primary earner’s 401(k) is the greatest asset other than the home. Should the parties decide to divorce, they must decide how to divide the assets in that plan or have the court decide for them.
A Qualified Domestic Relations Order addresses retirement benefits
Cashing out a 401(k) incurs tax liability and early withdrawal fees. It is better to let the plan mature, taking advantage of tax-free growth, and divide it later. A Qualified Domestic Relations Order (QDRO) settles the terms for how a 401(k) is to be divided. Spouses can negotiate a QDRO and submit it to the court for approval or, failing an agreement, litigate the matter and have the court decide. Once finalized, the QDRO goes to the administrator of the fund with instructions about how and when the assets should be dispersed.
Dollar amounts versus percentages, and other pitfalls in QDRO division
There are many potential pitfalls. Imagine that a couple has been married for 20 years. The husband has a 401(k) that is 25 years old and valued at $100,000, and he anticipates working another 10 years after the divorce. By some formulations, the wife would be eligible for one-half of four-fifths of the value, or $40,000. But how much of the next 10 years’ growth can she claim? What impact does the next 10 years have on the value of the 401(k)? Should the wife have a say in the allocation of the husband’s contributions, such as what mutual funds to invest in, or how much of the assets should be in stocks and how much in bonds?
Suppose the 401(k) is projected to be worth $200,000 upon retirement. Should the wife ask for 50 percent or $100,000? Suppose the market takes off over the next decade and the portfolio doubles in value. If she’d taken 50 percent, she’d have $200,000. If she’d asked for $100,000, she’d only get a quarter of the funds. But if the market crashed and the account lost 40 percent, it would only be worth $160,000. If the wife had agreed to half, she’d get $80,000, but if she’d demanded $100,000, that’s what she’d get.
To properly negotiate your QDRO, your Connecticut divorce attorney must appreciate the complexity of various financial instruments. In a case with complicated pension issues, Flaherty Legal Group seeks the advice of Plan Administrators and professionals specializing in the drafting and implementation of Qualified Domestic Relations Orders to ensure that Proposed Orders submitted to the Court address any and all issues necessary to protect our client. In the Hartford area, Flaherty Legal Group works to place you in the best financial situation possible after your divorce.