If you have built up significant retirement assets during your career, you may dislike the idea of splitting them with your spouse in your divorce. While you may not want to leave your spouse high and dry, you may fear for your own future financial security if you give your spouse half of what you accumulated during your marriage. By understanding what steps you must take to split these assets, the process becomes more straightforward and you are in a better position to protect your financial future.
Two ways to divide your retirement assets
The manner in which you divide your retirement assets will depend on whether they are in a workplace retirement plan or an individual retirement account (IRA). Most workplace retirement plans, like your 401(k) and pension, must be divided using a qualified domestic relations order (QDRO). A QDRO is a separate order from the divorce decree. The terms in the QDRO must be drafted carefully to ensure that retirement assets are divided as intended and in compliance with the specific retirement plan’s rules. Because every retirement plan has different rules, a separate QDRO is needed for each plan being divided. It is important to enlist the help of an attorney when drafting yours to ensure a tax-free, penalty-free transfer of your assets, whether directly to your spouse or into a rollover IRA. Your spouse, though, will pay taxes on any distribution they take, whether immediately or in the future.
An IRA does not need a separate court order to be divided. However, if you divide your IRA improperly, you could face tax consequences and early distribution penalties. To avoid these outcomes, you must provide sufficient detail in your divorce decree. Carefully consider how to determine the amount that will be transferred to your spouse since the balance in an IRA is constantly changing. You will need to provide a copy of your decree to the custodian of your IRA, as well as fill out the proper paperwork to ensure your assets are transferred properly. Your spouse will need to establish a rollover IRA account in which to transfer the funds.
Understanding your alternatives
You may want to exchange your interest in other marital property to retain ownership of your retirement assets. In this case, be careful you do not “short” yourself by taking pre-tax retirement assets that appear to have the same value as another asset, like equity in a house, that you are willing to give up to your spouse. Appearances can be deceiving, and once your pre-tax retirement asset is adjusted to account for the taxes you will need to pay when you use the asset, you may be surprised to learn you did not get nearly as much as you thought you were getting. You may want to negotiate for more retirement dollars so that after adjusting the value for taxes and other fees, you receive an equitable division of the overall marital assets.
Dividing retirement assets can be one of the trickiest parts of divorce. To make sure you split yours properly, you will want to seek the help of a family law attorney.