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How Are Retirement Accounts Divided During Divorce?

Dividing assets during a divorce can be stressful for both parties, especially when it involves retirement funds. Here, the Maryland divorce attorneys at Rodier Family Law discuss how 401(k) plans and other defined-contribution retirement plans can be divided during a divorce.

What are Different Types of Retirement Accounts?

Both 401(k) plans and IRA plans can be offered to employees through their employer. These are just two types of the many different kinds of retirement accounts or pensions that you or your spouse may have at the time of a divorce. These defined contribution plans are often tax-deferred and vary in terms of contribution limits, but both options frequently allow employers to match a certain contribution. While the 401(k) plan is the most popular form of defined contribution plan, various IRA plans, such as the Simplified Employee Pension (SEP) IRA plan and a Savings Incentive Match Plan for Employees (SIMPLE) IRA plan may also be offered by your employer depending on the company and number of employees. 

How are Retirement Assets Divided During Divorce?

If you or your spouse have been contributing to a 401(k) plan, especially for a significant amount of time, it may be complex to figure out how to divide the 401(k) plan without the help of a qualified divorce attorney. Contributions to a 401(k) plan during the marriage are considered marital property as the asset, or the portion of the asset, was accrued during the marriage.  If all or a portion of a 401(k) plan was acquired before the marriage, the 401(k) plan may consist of entirely non-marital funds not subject to division, or consist of part marital and part non-marital funds, the non-marital portion being subject to division.  

Are 401(k) Plans and IRA Plans Divided Differently?

The distribution of assets to a former spouse for a 401(k) plan must be through a Qualified Domestic Relations Order, or QDRO, to avoid early withdrawal penalties and taxes.  A QDRO must be signed by a judge and is a separate court order from the divorce decree. The transfer of assets from one spouse’s retirement account to another via QDRO is without tax consequences.  

IRA plans do not always require a separate IRA Transfer Order for the retirement assets to be properly divided, although it may be a best practice to submit one to the Court and then serve it on the IRA—instead, the assets in an IRA may be divided through a “transfer incident to divorce,” which means that when the assets are transferred, the spouse who is receiving their portion of the transferred assets will assume tax responsibilities regarding distributions or withdraws. 

Parties should note that while the transfer of retirement assets from one spouse to another incident to a divorce is not subject to tax consequences or penalties, withdraws or distributions made by the recipient spouse may result in tax consequences and/or penalties to the recipient spouse.

Many domestic attorneys, including our attorneys, often utilize the services of attorney-experts who assist counsel and the parties in understanding various retirement plans and in the drafting and negotiation of the division of retirement assets as these matters are complex and there are many variations between Plans.   

Learn More From a Qualified Divorce Attorney at Rodier Family Law

Divorce is already a stressful life event for both parties involved, and anxiety is heightened when disputes over asset division arise. That is why it is imperative to speak with an experienced team of divorce attorneys, such as the divorce attorneys at Rodier Family Law, to learn how you can properly divide your retirement assets in the least complicated way. If you are experiencing divorce and need to speak to a qualified divorce attorney regarding how to properly distribute your retirement assets, contact Rodier Family Law today.