How to split retirement accounts in divorce?

[MrMoneySaver]

Let's say two spouses are negotiating a separation agreement. They each have a mix of pre-tax and post-tax retiremenent accounts. That includes 401Ks, traditional IRAs, and Roth IRAs. There is also a bit of cash sitting in bank accounts.

My holdings overall are a bit larger than hers, so most likely I'll need to make a payment to her. It will probably come from my bank account or the principle of my Roth IRA. (We will avoid doing any QDROs.)

In order to come up with a fair settlement, how do you compare pre-tax to post-tax accounts?

My thought was to multiply pre-tax accounts by .85, thus reducing them by 15 percent to account for future taxes.

What do you think? Is there a standard way to do this?

[Omy]

Interesting question. I did not make that adjustment when divorcing...just added up our accounts at face value and divided by 2 (plus a bit more for me since I came into the marriage with money and paid off all of his debt).

[terran]

Why not do a QDRO? Are they especially difficult? It seems like that would be the most straightforward and fair way to do it since you'd each end up with equal account types/values so you don't have to consider various tax treatments.

[MrMoneySaver]

I believe there would be fees for that. It would be several QDROs, I assume, since we have several accounts. If we could figure out how to adjust for tax treatment, we could easily equalize things with one lump-sum payment.

[reeshau]

I believe there would be fees for that. It would be several QDROs, I assume, since we have several accounts. If we could figure out how to adjust for tax treatment, we could easily equalize things with one lump-sum payment.

Well, the straightforward thing to do would be to de-rate the pre-tax account by your tax rate.  That doesn't take care of tax-deferred compounded growth, but the receiving spouse could adjust their future 401k contributions to re-balance their tax status.  (assuming they aren't already maxing the 401k)

Are you both up for this idea?  If you wanted to get fancy, you could have a CPA or financial planner find the expected future value of the accounts.

[BECABECA]

Not specifically addressing your question, but with an upcoming divorce, make sure you both review your beneficiaries designated for each of your retirement accounts. I had a coworker pass away and he hadn’t changed that and it all went to a long since ex instead of his kids, and so this has been seared into my mind.

[secondcor521]

I believe there would be fees for that. It would be several QDROs, I assume, since we have several accounts. If we could figure out how to adjust for tax treatment, we could easily equalize things with one lump-sum payment.

QDROs at Vanguard are free.  Or at least they were in 2006 when I did one as part of my divorce.  Both accounts were at Vanguard.

I can't imagine a custodian charging for QDROs.

We did not adjust for taxes in our divorce, so we managed to equalize with one QDRO.

[mm1970]

Let's say two spouses are negotiating a separation agreement. They each have a mix of pre-tax and post-tax retiremenent accounts. That includes 401Ks, traditional IRAs, and Roth IRAs. There is also a bit of cash sitting in bank accounts.

My holdings overall are a bit larger than hers, so most likely I'll need to make a payment to her. It will probably come from my bank account or the principle of my Roth IRA. (We will avoid doing any QDROs.)

In order to come up with a fair settlement, how do you compare pre-tax to post-tax accounts?

My thought was to multiply pre-tax accounts by .85, thus reducing them by 15 percent to account for future taxes.

What do you think? Is there a standard way to do this?

There are people who do this math for you for a living.

Source: a friend is getting divorced, and her soon to be ex was just going to give her half of the current value of his retirement accounts (mostly pensions).  Nope, she gets half of the FUTURE value.

Math is probably a little bit easier with non-pensions. 

[formerlydivorcedmom]

When I divorced, they treated the pre- and post-tax accounts the same.  We used a QDRO to split his 401k and I promptly moved my portion to an account in my name - at no charge to us (although I had to argue with the customer service rep, who thought I should cash out rather than roll the money over.  Sigh.).  I get to withdraw that money out of my IRA when I retire and pay taxes at whatever my rate is then.  It doesn't matter what rate either of us would pay at the time of divorce.

We also had language that I'd get half the value of some stock grants in his name that were about to vest.  He argued vociferously that he since he had to pay taxes on the sale, I should get half of the net value, but my lawyer said nope.

Different jurisdictions handle things differently.

[Daisyedwards800]

I wouldn't derate the pre-tax since that is arguably more advantageous account.

[Fuzz]

Sounds like you're DIY on the divorce, which is fine. But if you have significant assets in the retirement accounts, it is worth paying a lawyer to ensure that you're following your state laws. I could envision a scenario where a DIY property division is later set aside for violating a provision of state law. You could hire a lawyer/CPA just for the QDRO portion. I think there is a guy that does nothing but QDROs for under $500/order that you could find online.

[MrMoneySaver]

I wouldn't derate the pre-tax since that is arguably more advantageous account.

So you would divide treat a 401k and a Roth equally -- just accounting for the face value?