Tracy Stewart
Tracy Stewart
Mistakes to Avoid in Dividing the Nest Eggs

Splitting up the retirement accounts in a divorce is not as simple as many couples think. How to avoid key mistakes.

March 18, 2010
by Tracy Stewart, CPA, PFS

For many couples, the retirement accounts continue to be among the largest assets. Many couples have no grasp on what the rules are and how complex the division can be. What they don’t know, will hurt them.

Not Just a Paragraph in the Decree

When it comes to a divorce, it is crucial to use a QDRO (qualified domestic relations order) to divide the qualified plan accounts. Examples of these plans include 401(k), 403(b) plans and defined benefit plans (sometimes referred to as pension plans).

Without a QDRO, splitting the accounts between divorcing spouses as well as subsequent withdrawals from the accounts is subject to federal taxes and early-withdrawal penalties. There are many details to consider in every QDRO, but the first one is to agree on the split. Couples need to agree on either a percentage division or a dollar-amount division of the account.

Percentages vs. Dollar Amounts

I’ve seen instances of both methods, but I am wary when a couple wishes to divide an account in dollars instead of percentages. For example, if the total account value is $800,000, they might wish to split the account 50-50, but state in the decree only that one spouse is to be awarded $400,000. The decree is silent on the amount of retirement funds the other spouse will be awarded because the couple assumes the $400,000 will still be half or nearly half the account value at the date of divorce. The risk here is that if the investments lose value, one spouse will be awarded $400,000 while the other spouse will be awarded less than $400,000. In a recent Wall Street Journal article, a family law attorney described a case in which spouse A had to pay additional funds to spouse B because the two of them had agreed to a dollar-amount division with a specified dollar amount to spouse B. Between the time the decree was filed with the court and the day the account was to be actually divided, the retirement account lost so much value that the funds remaining in the retirement account were insufficient to fund the amount that was awarded to spouse B. Spouse A was left without retirement funds and an obligation to pay spouse B a sum to replace the insufficient funds.

What You Don’t Know Will Hurt You

I had a client who came to me years after he had done his own divorce to save money. His retirement plan was a pension plan with a state agency. He wanted to “pay off” his wife as quickly as possible in advance of his own retirement, but wanted to get the “pay off” funds from his pension account. They had agreed upon a certain lump sum amount. They had gone their separate ways, each assuming the retirement-account split would be taken care of by virtue of the divorce decree.

After several years, his first wife tried to get her lump sum payment from his pension. The pension administrator told her that she could not get her share in a lump sum, and furthermore, there was no QDRO on file. This news prompted her to start nagging her ex-husband. When he didn’t fix the situation, she escalated with a threat to prove that he was still married to her. This made his current wife very unhappy. Working with me and a family law attorney, he got the situation straightened out. In retrospect, he regretted his attempt to cut costs. He ended up spending more to fix the situation because he had not hired an attorney in the first place. He also felt the resulting emotional cost was too high.

It is important to understand that QDROs don’t cover all retirement accounts. Individual retirement accounts (IRAs) are not split with QDROs. Non-qualified plans fall outside of employee retirement income security act (ERISA) guidelines and are therefore not divided with a QDRO. Besides IRAs, these plans include (but are not limited to) deferred compensation plans, executive bonus plans, group carve-out plans, stock options and restricted stock. They are designed to meet specialized retirement needs for key executives. Nonemployee spouses need to verify which retirement plans are divided by QDRO and which are not. It would be devastating to think the entire retirement accounts were divided 50-50 with a QDRO and find out later that most of the retirement funds are not covered in the QDRO because they were in nonqualified plans.

Haste Makes Waste

Many litigated divorces include an attempt to stay out of a divorce trial by using mediation. Mediations frequently are long, grueling ordeals.  The emotionally charged issues seem to be discussed early in the day, with the more rational discussions about retirement account divisions coming after several hours of parenting discussions. Everyone is the room is tired. They just want to finish the deal and go home. They agree to divide the retirement by some ratio and be done with it. Unfortunately, there are subtle but very important details to consider that can materially affect the anticipated retirement nest egg. Sometimes these details don’t appear until later. A few examples of these details include:

For defined benefit (DB) plans

  • Early retirement subsidies;
  • Postretirement cost-of-living adjustments (COLAs);
  • Form of alternate payee’s payment; and
  • Preretirement survivorship protection for alternate payee.

For defined contribution (DC) plans

  • Plan loans;
  • Crediting/debiting of account for income/losses;
  • Alternate payee’s commencement date; and
  • Delayed plan contributions


When a couple chooses the collaborative law divorce process over litigation and mediation, they have time to carefully and fully address these and other details that can have a profound effect on their retirement life style. The collaborative process builds in the time and professional advice to assist the clients and their attorneys in designing a division of retirement accounts that fully addresses both spouses’ needs and concerns. In collaborative divorce cases, these decisions are made over a period of time that is measured in days or weeks, not in minutes.

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Tracy B. Stewart, CPA, PFS, CFP, CDFA specializes in family law litigation support in Houston, Texas. She helps clients protect their wealth during property settlement negotiations. She is a member of the AICPA Personal Financial Planning and the Forensic and Valuation Services sections. Stewart is a board trustee for the Collaborative Law Institute of Texas as well as on the Executive Board of Texas Society of CPAs. You can contact her through www.texasdivorcecpa.com.

The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all Regular Members, Associate Members and Non-CPA Section Associate Members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist Credential holder. Visit www.aicpa.org/PFP to learn more.