How are retirement assets split during a divorce?

On Behalf of | Mar 26, 2020 | High Net Worth Divorce |

Asset division during a divorce is often complex. This is especially true when it comes to retirement assets, which are among the most hotly debated divorce topics between couples. Different retirement accounts are split up in different ways, and it is important for couples to understand this process so they can go into their divorces fully prepared.

IRAs (individual retirement accounts)

The division of IRAs is decided by the court. Once the decision has been made, the entity overseeing the account must receive a copy of the court order. From there, certain administrative changes must be made to the account so the assets can be divided. In many cases, the money that is being distributed to the spouse will be placed into a rollover IRA. There are tax implications and penalties associated with====[ IRA withdrawals, so the proper process must take place to prevent issues.

For example, if the owner personally withdraws funds to be distributed to their ex and is under the age of 59 and a half, a 10-percent penalty will be assessed. The owner of the IRA will also be taxed for the withdrawal, which can get quite expensive depending on how much money is taken out of the account. The best way to avoid these issues is to allow the trustee of the original IRA to transfer money to the rollover IRA, which incurs no such penalties.

Employer-provided plans

The process of dividing 401(k)s and pension plans is somewhat more complex: In this case, you will need a qualified domestic relations order (QDRO). While QDROs are drafted based on decisions made within the divorce agreement, they remain a separate entity.

The owner of the employer-provided account must have their attorney contact the administrator of the account with explicit instructions on how the funds should be distributed. In some cases, they may also be placed into a rollover IRA. In others, they will be withdrawn and distributed directly to the spouse. With 401(k)s and pensions plans, early withdrawals can occur as a result of a divorce without worry about the 10% penalty. The same tax laws will apply, however.