Dividing assets during divorce is often one of the challenging parts of the process. Retirement assets may represent a significant portion of a couple’s assets. Dividing them can often be complex, but this must ultimately be done before a divorce to be finalized.
Retirement accounts typically include funds that were earned during the marriage, so they must be divided as marital property during divorce. There are several factors that may play a role in how these accounts may be divided. These include things like each spouse’s contributions, the length of the marriage and the overall financial situation of each person.
Because there are penalties for pulling money out of a retirement account, it’s critical to ensure the proper paperwork is completed during the divorce. The type of retirement account that’s being handled determines what’s necessary for a transfer to occur without unnecessary penalties or tax consequences.
Qualified plans like 401(k) accounts
For qualified plans like 401(k)s, a Qualified Domestic Relations Order (QDRO) is often required. A QDRO is a legal order that makes it possible to transfer funds from one spouse’s account into a retirement account owned by the other spouse.
When a QDRO is issued, there isn’t any tax penalty as long as the transfer is into a retirement account. This order must include specific information, such as the exact what the funds should be divided and specific information about both parties.
The plan administrator of the account the funds are coming out of must approve the QDRO before it’s executed. If the administrator doesn’t approve the document because of an issue or error, it’s sent back to have the corrections made before the transfer is completed.
Individual retirement accounts
For Individual Retirement Accounts (IRAs), the process is a bit simpler. A transfer incident to divorce allows the assets to be transferred directly to the other spouse’s IRA without tax consequences as long as the transfer is specified in the divorce decree.
Retirement accounts are only one part of the property division process, so anyone going through this should ensure that their property division arrangements properly balance out all marital assets and debts across the board. Having a legal representative to work through the process can help individuals to seek a fair outcome.