As the world slowly begins its back-to-normal phase, the aftermath of the pandemic has left a lot of devastation in its wake. If your marriage didn’t survive quarantine, you may be wondering how the division of financial assets will play out. Here’s what you need to know.
Divorce can be hard to deal with emotionally, and it can also come with financial challenges. When it comes to asset division, your assets may be awarded to one party. Whether you are giving up funds or receiving them, you need to understand the rules that govern asset division in a divorce.
Property Division 101
Since retirement plans can be of significant value and often come with important tax implications, it’s critical to understand how they are divided in a divorce so that your interests are better protected.
There are two types of property division in divorce, depending on where you live: community property division and equitable distribution.
If you live in a “community property” state, the law considers all assets and debts acquired during the marriage as “community property.” Community property means that both spouses own the property jointly, and the court will divide the property equally (50/50) between the spouses at divorce. This can include contributions to retirement accounts such as 401(k) accounts.
Is Iowa a Community Property State?
The state of Iowa does not follow community property laws. Instead, Iowa is an equitable distribution state: meaning Iowa law recognizes that some assets are a spouse’s separate property and the court will not divide these in a divorce. Any portion of your retirement plan earned before you were married is your separate property.
Some factors considered by Iowa courts in a property division case include non-monetary contributions, contributions to a partner’s education and a list of other factors defined in Iowa law.
During divorce you can make decisions with your spouse to divide assets and liabilities, or you can request the court make a ruling for you. Generally, agreements made at between spouses are a better fit for each party than those handed down by a court that has little knowledge of your family and financial situation.
Is there a set list of statutory factors for determining property division in the state of Iowa?
Iowa has a list of factors set by statute that specify what the court will use to determine a fair property division. Examples of factors that are often taken into consideration during property division cases include:
- Marital Fault – In states that allow at-fault divorces, the fault of one spouse may be used by the judge to justify a higher percentage to the injured spouse.
- Income and Earning Capacity – The court may consider the relative incomes and earning capacity of each spouse, which may be affected by factors such as age, education, and health. The spouse with lower economic prospects may receive a larger percentage of the estate.
- Educational Contributions – In Iowa, spouses who contributed significantly to their partner’s education or earning capacity may receive a percentage of the marital property.
- Custody of Children – If one spouse has full custody of the couple’s children following the breakup, this may result in higher likelihood of receiving a higher percentage of the estate, or certain pieces of marital property (like the family house).
Qualified Domestic Relations Order (QDRO)
If you do decide to divide your retirement plan, or if an Iowa court orders it because you and your spouse have not negotiated a marital settlement agreement, federal law becomes involved. Defined benefit and defined contribution plans require qualified domestic relations orders – familiarly known as QDROs – for division. The Employee Retirement Income Security Act prohibits distribution of benefits under these plans to anyone other than the plan participant, but QDROs override this ERISA provision.
According to the IRS, a Qualified Domestic Relations Order (QDRO) is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant. If you receive QDRO benefits from a retirement plan, you are required to report the payments as if you are a plan participant as well as receive a proportionate share of the account basis. In addition, as a former spouse of the employed participant, you can roll over any payments from the plan into another retirement account—for example, an individual retirement account (IRA).
Although your divorce settlement may say you have rights to a portion of your spouse’s retirement plan, the distribution must be done pursuant to a QDRO so as not to disqualify the plan for assigning benefits to a person other than the plan participant.
Dividing an IRA
When dividing an IRA, the couple doesn’t need to go through the QDRO process. Instead, you can request a direct transfer, or “a transfer incident to divorce.” The account owner will order the IRA plan administrator to transfer the necessary assets directly to the other spouse’s new IRA account.
Another option for IRAs is “renaming” the accounts. The owner-spouse opens a new IRA account, places the other spouse’s name on the old account, leaves the appropriate funds in the old one, and transfers the remainder into the new account.
If the courts and the IRA and/or qualified-plan custodians recognize your divisions as QDROs or transfers incident to divorce, there will be no tax consequences for you or your ex.
Financial Wellbeing Checklist Post-Pandemic Divorce
Now life is returning to somewhat normal, it is a good time to evaluate your financial situation carefully. It’s important to understand and take charge of your financial well-being after going through a divorce.
Review and update the following documents:
- Take the necessary steps to make any name change official. Get a copy of your court order for use when requesting that agencies and creditors change your name in their records.
- Review and update files for all personal accounts and property.
- Update your will and estate plan.
- Update beneficiaries for your IRA(s), 401(k) plan, and life insurance.
- Update your health and life insurance records as needed.
- Update your name on the titles of all property you own.
- Request copies of your credit report to check for accuracy—you can request copies at AnnualCreditReport.com.
- Update your income tax filing choices and W-4 as needed.
Last Thoughts
Divorce can be costly in terms of lawyer fees and emotional health, but it can also have costly effects on your future financial security.
Learning as much as you can is the first step, and it’s one of the best things you can do. At Johnson Wealth and Income Management, our commitment is to help you work towards achieving all your financial goals and to help provide you with a “worry free” retirement.
From tax strategies to estate planning, we represent our clients and their interests, rather than any specific company. If you are going through a divorce in the state of Iowa and need financial advice, contact us here today for a complimentary consultation.
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