The emotional turmoil of divorce can be used as an opportunity to secure clients’ financial futures, advisor Marilyn Timbers says.
Providing sound financial advice, while no cure for a broken heart, can help alleviate some of the burdens of divorce, especially if clients have little experience with financial planning, says Timbers, a retirement coach at Voya Financial Advisors.
“It’s important for a person who has recently gone through divorce to sit down with an an advisor and draw up a plan for their individual goals,” says Timbers. “If you’re working with a client that has been less dominant in the financial side of the relationship, it first becomes a matter of taking a step back and educating them about all aspects of financial planning.
Timbers offers five tips for advisors helping divorced clients to address their retirement savings.
1. Make sure the retirement plans are divided according to the divorce agreement.
This issue is twofold: making sure that all of the parties in the divorce have a holistic understanding of how much money is in each partner’s nestegg and that the retirement accounts are fairly divided. These tasks are most often handled by a forensic accountant and the clients' attorneys, but an advisor should help make sure that all assets are distributed in accordance with a qualified domestic relations order, or QDRO, which is the plan created in divorce court to split retirement assets.
Under a QDRO, a portion of an ex-spouse's 401K is rolled over into a client's IRA. Before the rollover takes place, however, a client under age 59 1/2 may elect to distribute some or all of the money directly to themselves without incurring a 10 percent early withdrawal penalty. Doing so might be helpful for recently divorced clients experiencing cash flow disruptions, seeking new residence or vehicles or struggling to pay legal fees.
“It’s also important to note the one-time opportunities to withdraw money from an ex-spouse’s retirement plan without paying the 10 percent [early withdrawal] penalty,” says Timbers. “Oftentimes clients need to withdraw due to expenses related to divorce. Granted, they’ll pay taxes, but they won’t be subjected to the penalty.”
2. Change the beneficiary on clients’ retirement accounts.
It’s up to the advisor to follow up and make sure that an ex-spouse is no longer the beneficiary after a divorce, if that is what the client wishes.