Common Errors When Going Through Divorce.

• Position: Brief Article - Statistical Data Included

Mishandling financial matters in a divorce can cost a divorcing party a significant loss of wealth. Carol Ann Wilson, founder of the Institute for Certified Divorce Planners, Denver, Colo., cites several common mistakes. For example, numerous errors arise around the Qualified Domestic Relations Order. A QDRO is a court order that instructs the administrator of a qualified retirement plan what percentage or dollar amount of the employee's account is to be distributed to the nonemployee spouse in a divorce settlement.

Advisors and their clients should be aware that, although most qualified retirement plans such as 401(k) plans can be divided in a divorce, some small-employer and government plans are not required to be divided by a QDRO. Early death also causes many problems in the QDRO area. For instance, Wilson points out, "if the employee dies after the divorce, and no order is in place, the ex-spouse may lose every bit of interest in the retirement plan. This is because the nonemployee is unprotected during the period between the divorce and the QDRO approval."

Another area of confusion involves money taken from an individual retirement account as part of a divorce settlement. Money distributed from a qualified plan to the nonemployee under a QDRO is subject to ordinary income taxes, assuming it is not rolled over into an IRA, but is not subject to the 10% early withdrawal penalty even if the nonemployee is younger than 59.5. However, divorcing spouses often roll such distributions directly into an IRA. If they later...