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What happens to retirement accounts during divorce?

On Behalf of | Dec 20, 2023 | Family Law And Divorce |

Divorce inspires the challenging task of dividing assets. Retirement accounts are often a significant focus of this process, as they’re often a significant asset.

When each party has their own account and both accounts are of similar value, there might not be any need to divide these retirement accounts. In the absence of that, there are specific rules that govern the division of these accounts.

When is a qualified domestic relations order necessary?

A qualified domestic relations order becomes essential when dividing qualified retirement accounts in a divorce. These legal orders are specifically designed to address the distribution of retirement benefits, ensuring that the non-employee spouse receives their rightful share.

QDROs are typically required for dividing retirement plans covered by the Employee Retirement Income Security Act, such as 401(k)s and pensions. Without a QDRO, dividing these assets can become legally complicated and end in unintended tax consequences or loss of benefits.

When is a transfer incident to divorce necessary?

Transfers incident to divorce are crucial for handling individual retirement accounts during the division of assets. Unlike retirement plans that require a QDRO, IRAs can be split under the divorce decree or separation agreement without incurring early withdrawal penalties or immediate tax liabilities.

This permits the transfer or rollover of the IRA assets to the other spouse, which is a non-taxable event. Executing these transfers correctly is essential to avoid potential tax implications and ensure both parties receive their fair share.

What else is considered in property division?

Beyond retirement accounts, property division in divorce encompasses a wide range of assets. This includes physical properties like homes and vehicles, investments, business interests and debts. Finding the appropriate division for everything is often a delicate balancing act.

The property division process is often a contentious matter, so understanding what’s possible is important. Anyone who is facing divorce should ensure they’re thinking logically about how the options available can impact their future. It may behoove them to seek legal guidance to evaluate the possibilities and effectively execute a strategy that makes sense given their unique circumstances.