The #1 Most Overlooked Divorce Asset

If you're going through a divorce, you know that there is a LOT of financial wrangling. Alimony and child support need to be decided, the house has to be split and things like TVs, furniture and cars are also thrown into the mix.
10/02/2014 02:53 pm ET Updated Dec 02, 2014

If you're going through a divorce, you know that there is a LOT of financial wrangling. Alimony and child support need to be decided, the house has to be split and things like TVs, furniture and cars are also thrown into the mix. What many people forget about, though, is the potentially most valuable asset: your spouse's retirement account.

Although there are a lot of scary headlines in the media about how people are not prepared for retirement, the truth is that retirement funds are a big and booming business. Most working Americans have succeeded in stashing away a decent nest egg, and it can often amount to hundreds of thousands of dollars. If you're going through a divorce, you have a right to some of those funds.

The first step in the process is locating and identifying the retirement accounts. If you're on semi-friendly terms with your soon to be ex, try asking. A working individual can have more than one IRA or 401(k), especially if they've switched jobs often. If asking doesn't help, then you or your lawyer might need to contact each employer separately and ask about their retirement plans. Be patient, though, as some companies may request a court order before releasing this information.

Once you've found out about the existing retirement accounts, the next step is to work out the split. Some kinds of accounts (like IRAs) are regulated by state law, while others (401k, pensions, etc.) fall under federal guidelines. Your lawyer or accountant should be able to help you in determining the exact numbers. In general, though, the split will be roughly even but limited to the funds that accrued while you were married.

After the split has been determined, the next step is to make it legal with an official document. The document your lawyer will be drafting for this purpose is called a QDRO -- Qualified Domestic Relations Order. After this document is finished, it will be sent to the judge for approval. It's important to draft a QDRO and not just rely on the general divorce agreement because retirement benefits have special legal requirements. In order to maintain the tax benefits of the retirement funds and be designated an Alternative Payee, you must go through a QDRO. Because of this, it's important to draft and finalize the QDRO before signing the divorce agreement. Trying to work through the legalities of retirement funds post-divorce can be frustrating, time consuming and possibly ineffective.

Keep in mind that you don't have to take the retirement benefits themselves, but rather you could use them as a dollar figure for your general negotiations. In that scenario you would have the accounts evaluated by a financial professional (often an actuary) and then receive other assets in lieu of that value. For instance, if the retirement accounts are estimated at $500k and that happens to be the value of the house as well, then you may agree to take the house while your ex gets the retirement account.

In the case where you decide to take the retirement funds themselves, your next step would be to roll them over into a new retirement account. Now this is where you have to make a serious choice. You can keep them in a standard market product like a mutual fund, or you can roll them over into a self-directed account and go your own way. A mutual fund is definitely easier, and the returns you get should be on par with everybody else. The self-directed route requires a little more attention, but it gives you the freedom to go beyond Wall Street. If you know of a property that would make a great investment, or there's a business you're interested in, then self-directed is the way to go.

No matter which route you take, always research it carefully beforehand. Every asset has its own peculiarities and not all identical dollar amounts share the same value. Houses always sound like a good idea, but they come with the additional burdens of upkeep and possibly not being able to sell at market price. Similarly, retirement funds are eventually withdrawn as cash, but you may not have access to that cash until your spouse hits retirement age. Plan your divorce accordingly, and it should keep you smiling for a good long time afterwards.