Your Legal Rights at Work

How Divorce Deals With Retirement Accounts

by Lewis Hamilton

During a divorce, retirement accounts can be subject to division as part of the overall property settlement. The specific rules and procedures for dividing retirement accounts vary depending on the jurisdiction and the type of retirement account involved. Here are some key points to consider when the issue of retirement accounts arises.

Marital Property

Retirement accounts accumulated during the marriage are generally considered marital property subject to division. This includes accounts such as 401(k)s, pensions, IRAs (Individual Retirement Accounts), and other similar plans. However, retirement accounts that predate the marriage or are considered separate property may be excluded from division.

Equitable Distribution

In most jurisdictions, retirement accounts are divided using the principle of equitable distribution. Equitable distribution may not mean an equal split. Instead, the goal is a fair division of assets based on several factors.

Qualified Domestic Relations Order (QDRO)

A QDRO is a court order that allows for the division of certain retirement accounts, such as 401(k)s and pensions, without incurring penalties or taxes. It specifies how the funds will be allocated between the divorcing parties. A QDRO is necessary to ensure that retirement account assets are transferred properly between spouses. In most cases, retirement funds are considered marital property regardless of the name on the account. 

IRA Transfers

With IRAs, a divorce decree or separation agreement can serve as the basis for transferring funds between spouses without incurring early withdrawal penalties or taxes. The transfer must be done as a direct trustee-to-trustee transfer to maintain the tax-deferred status of the funds.

Tax Implications

It's important to consider the potential tax implications of dividing retirement accounts. Certain retirement accounts, such as traditional IRAs or 401(k)s, may be subject to income tax upon withdrawal in the future. Consulting with a tax professional or financial advisor can help you understand the tax consequences of the division and the most advantageous way to handle retirement account assets.

Pre-nuptial or Post-nuptial Agreements

If a couple has a valid pre-nuptial or post-nuptial agreement in place that addresses the division of retirement accounts, the terms of that agreement generally dictate how the accounts will be divided unless there are exceptional circumstances.

It's important to work alongside experienced legal and financial professionals, such as family law attorneys and financial advisors, to navigate the complexities of dividing retirement accounts during a divorce. They can help ensure that the division is fair, in compliance with applicable laws, and aligned with your long-term financial goals.

To get started contact a family lawyer in your area.