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How are retirement accounts divided in divorce?

On Behalf of | Dec 20, 2023 | Property Division

Divorce often brings into question the fate of retirement accounts. These accounts form a substantial part of the marital assets and are subject to division during the dissolution of a marriage. The exception to this is if each party has their own retirement account, and those accounts are of similar values.

The division of retirement assets can become a complex issue that’s influenced by the type and value of the accounts and the duration of the marriage. Qualified and non-qualified retirement plans are treated differently in the context of divorce, and each has specific rules that must be considered.

What happens to qualified retirement plans?

Qualified retirement plans, such as 401(k)s and pension plans, are governed by a qualified domestic relations order (QDRO). This legal order specifies how the spouses will divide and allocate the retirement assets. It helps avoid any tax penalties or early withdrawal fees that might otherwise apply. The plan administrator must approve the order, or it can be sent back to the court for clarification and correction.

What happens to non-qualified retirement plans?

Non-qualified retirement plans, like individual retirement accounts (IRAs), are treated differently from qualified plans during a divorce. These types of plans don’t require a QDRO for division. Instead, the divorce decree or settlement agreement typically addresses the division of assets from non-qualified plans through a transfer incident to divorce. Proper documentation and adherence to these regulations are essential to ensure that the transfer is tax-free and does not attract any penalties.

How does this affect property division?

Dividing retirement accounts in a divorce significantly affects the overall property division. Because property division is such a major component of divorce, it’s critical to think logically about the decisions you’re making. Anyone who’s going through divorce should ensure they have sound legal guidance to review the options so they’re able to make decisions in their best interests.