How Are Retirement Accounts Split in Divorce?

Dividing property in a divorce is never easy. Certain types of assets, including retirement plan assets, can be especially difficult to deal with. This raises an important question: How are retirement benefits divided in a divorce?

The retirement funds held by you and your soon-to-be ex-spouse are generally marital assets. These retirement assets will be subject to property division in a divorce. However, you should not simply withdraw the assets out of a tax-advantaged retirement account in a lump sum and split them up.

If you do so, it could subject you to significant early withdrawal penalties and other tax penalties. Instead, you can use a type of legal document called a qualified domestic relations order (QDRO) to ensure that everything is divided properly without any penalties. A QDRO should always be drafted by a lawyer, as it must meet certain strict technical standards to be valid.

Community Property vs. Equitable Distribution

Depending on where you live, your marital assets in a divorce may be subject to community property rules or equitable distribution rules. Under community property state laws, assets and debts gained during the marriage are equally owned by the spouses and get divided 50-50 in a divorce. Equitable distribution, by contrast, requires marital property to be split in a “fair” manner, which may or may not be 50-50. It depends on the specific circumstances of the case. All of a couple’s marital property falls under these rules, including retirement accounts,

A Qualified Domestic Relations Order (QDRO) Will Protect Your Assets

Most people have a large share of their retirement savings in a tax-advantaged account, such as an Individual Retirement Account (IRA) or a 401(k). By saving money in these accounts, you can limit your exposure to federal taxes. However, IRAs and 401(k)s are subject to strict disbursement rules. If you draw on these accounts early, you could be hit with a large tax penalty. This creates a serious challenge for couples who want to split up the proceeds of a retirement account in a divorce.

A qualified domestic relations order (QDRO) provides the solution. The Internal Revenue Service (IRS) explains that a QDRO is a legal order that allows a retirement plan to pay benefits directly to an alternate beneficiary without any adverse tax consequences. Essentially, a QDRO allows a current or former spouse to be treated like one of the plan’s participants.

A Divorce Lawyer Can Help You Find the Right Solution

If you have any specific questions or concerns about retirement accounts and divorce, contact an experienced family law attorney for legal advice help. Other questions that a divorce attorney can assist help you with include:

• What does the divorce process involve and are there alternatives to litigation?
• What should be included in a divorce settlement agreement?
• Can alterations to a settlement agreement be made after the divorce decree?
• How are alimony/spousal support, child support, and asset division determined?

If you’d like to learn more about this area of the law, see our overview on divorce law.