January 11, 2021

What Will Happen to Your Retirement Accounts in a Divorce?

Couples in Bloomingfield Hills who have been married for decades and are now seeking a divorce face issues that their younger counterparts may not. One issue that may worry many of those at or near retirement is what will happen to their retirement accounts if they divorce. The following is some information about retirement accounts and divorce, but as always, this post does not contain legal advice for your specific situation.

Splitting a 401(k) or pension

Those who want to split a 401(k) or pension in their divorce will need to obtain a qualified domestic relations order (QDRO) to make such a transfer without incurring negative tax consequences. There are two ways a 401(k) or pension can be divided using a QDRO. One way is to award a separate interest in the balance of the 401(k) or pension plan. The second way is to permit the divorcing spouse to share in the other spouse’s payment of account funds. A QDRO is a separate legal document from a divorce decree. QDROs can be complex, so it is advisable to have a divorce attorney draft the document.

Splitting an IRA

Unlike splitting a 401(k) or pension, a QDRO is not necessary to split an IRA. If spouses want to divide an IRA, the terms of the division must be included in the divorce decree. In order to avoid negative tax consequences and penalties, the agreement should contain a specific percentage or dollar amount of the spouse’s IRA that will be directly transferred to the other spouse’s IRA.

If the spouse receiving the transfer withdraws cash in the process, this withdrawal will be taxed. In addition, if the spouse is under age 59.5, they will incur a 10% penalty for an early withdrawal. Also, if the account holder withdraws funds from the IRA to directly give to their ex, rather than executing a trustee-to-trustee transfer, this withdrawal will be taxed, and if the account holder is under age 59.5, a 10% penalty will be levied as well.

Learn more the division of retirement assets in your divorce

As this shows, splitting retirement assets in a divorce can be more complicated than splitting other assets in the property division process. Those interested in learning more about this topic can visit our website for further information.