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What happens to retirement accounts in divorce?

On Behalf of | Dec 29, 2023 | Division of Assets and Debts |

Retirement accounts are an essential part of marital assets. These accounts typically have to be divided as part of the property division process if the couple goes through a divorce. 

Several factors determine exactly how these retirement accounts are handled during the divorce

Comparable retirement accounts

If each party has retirement accounts of comparable value, it’s usual to consider these assets in the overall division of property. If the values are similar and both parties agree, they might each keep their accounts. This approach simplifies things, but it’s crucial to ensure the valuation of these accounts is accurate and considers potential future earnings or losses.

Qualified domestic relations orders

Qualified domestic relations orders are essential for employer-sponsored retirement plans like 401(k)s or pensions. A QDRO is a legal order entered as part of a divorce settlement that reallocates ownership of a retirement plan. This document is essential as it allows the non-employee spouse to receive their portion without triggering penalties or unfavorable tax consequences. It legally enforces the division of these assets according to the divorce agreement.

Transfers incident to divorce

Transfers incident to divorce are tax-free transfers of retirement assets from one spouse to another under the divorce decree. If done correctly, the IRS rules that such transfers aren’t considered taxable distributions. The receiving spouse doesn’t face immediate income tax on the transfer. 

For IRAs, the transfer rules differ slightly from employer-sponsored plans and usually require specific wording in the divorce decree to avoid tax penalties.

In short, dividing retirement accounts in a divorce is nuanced, especially when ensuring an equitable distribution. As with any legal process, it’s often smart to seek assistance to navigate these complexities effectively and ensure a fair and compliant division of retirement assets.