If you and your spouse have decided to end your marriage, is it likely that neither of you is looking forward to the property division phase of the divorce.
One of the areas of concern is the division of your retirement accounts. How does this work?
Looking at differences
The proceeds of retirement accounts, such as your 401(k) or Roth IRA, are normally marital property. In terms of distribution, different rules apply to different types of accounts. Your 401(k) will require the use of a Qualified Domestic Relations Order, or QDRO, to ensure the correct division of funds. A retirement account such as an employer-sponsored plan or a pension will require a separate QRDO. However, a “transfer incident” must be in place before moving the funds in an individual retirement account on a tax-free basis.
Making choices
There are various ways for you to receive retirement account distributions. You can cash out the portion the court awards to you, you can roll the assets over into your own retirement plan or you can wait until the account owner retires to take your distribution. Keep in mind that different tax consequences apply to different types of retirement accounts. For example, you make pre-tax contributions to a 401(k) or a traditional IRA, but you pay income tax before contributing to a Roth IRA.
Exceptions
Only those retirement accounts deemed marital assets qualify for division in the divorce process. If you owned a retirement account prior to your marriage, the court will award it to you as your separate property. Also, if you and your soon-to-be-ex signed a prenuptial agreement, the terms of that agreement will normally take precedence when the court determines how to split a retirement account. In short, the division of retirement accounts is often an area of confusion for a divorcing couple, but you can rely on legal guidance to help you sort it all out.
