If you and your spouse are preparing to divorce, how you handle your retirement accounts can have a significant impact on your financial future. The older you are and the more retirement assets you've accumulated, the more essential it is to have an experienced family law attorney and a financial analyst (perhaps a Certified Divorce Financial Analyst

Dividing Retirement Assets

The division of retirement assets is generally detailed via a Qualified Domestic Relations Order, which you'll hear your advisors refer to as a QDRO. If you're like many people, your eyes glaze over when you start hearing acronyms, and the financial intricacies of QDROs can be difficult to understand -- particularly at such an emotionally tumultuous time in your life. That's why it's essential to have both financial and legal advisors on your side who can help you make sound, rational decisions.

How retirement assets in a QDRO are divided depends in part on where you live. If you're in a community property state, it will generally be divided 50-50. In other states, a judge may decide what is fair and equitable. QDROs are court documents so are entered by a court. They're also reviewed by plan administrators.

Be Careful When Trading Retirement Accounts for Other Assets

In some cases, couples agree to let one person have the bulk of the retirement assets while the other one takes other assets that are of comparable value. Often this involves one person getting the home.

It's essential to understand the pros and cons of both sides of this type of arrangement. The spouse who takes the retirement account could end up paying significant tax penalties and fees for an early distribution. In the meantime, a home, even if it's owned outright with no mortgage, can cost more money to maintain than one person can afford.

It's wise to work with both your attorney and your financial professional to determine the tax implications as well as the long-term financial consequences of any decisions regarding your division of retirement assets and all property. What may look like a good deal in the short term can have costs you couldn't have foreseen for years down the road.