One of the most difficult parts of a divorce is deciding who gets what. Here’s how you can expect the court to divide your retirement account.
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One of the most contentious parts of a divorce is dividing up various assets, and retirement accounts are one of the most important. Understanding how the law typically divides these accounts can help the divorce process go more smoothly. It also helps you better understand what you need to do to plan for a healthy financial future.
Whether you have an IRA, pension, 401(k), or other type of retirement plan, it’s beneficial to understand what to expect.
Marital property and extramarital property
Whether assets such as retirement accounts need to be divided depends on whether they are marital or non-marital property. Marital property includes assets acquired during the marriage and is typically divided between the spouses. Retirement accounts with value accrued during the marriage are generally subject to division, regardless of whose name is on the account. Assets acquired before the marriage or through inheritance are classified as non-marital assets and generally remain with the original owner.
How to divide assets
How a court divides a retirement account depends in part on whether you live in a community property state or an equitable distribution state. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states. Generally, marital assets in community property states are divided 50/50, but it is beneficial to work with an experienced family law attorney who can provide you with state specifics.
The type of retirement account is important
Not all retirement accounts are treated the same way. Here are the differences:
401(k), pension and other qualified retirement plans
If the division of assets includes a 401(k), pension, or other qualified retirement plan, it is typically divided through a Qualified Domestic Relations Order (QDRO). A QDRO is a legal document that grants someone other than the original account owner the right to receive benefits from a retirement plan. This allows you to divide your retirement plan between your spouse, children, or other dependents as part of a divorce or legal separation. A QDRO may also be created as part of a child support order.
QDROs allow you to transfer funds without requiring the original account holder to pay early withdrawal penalties that typically apply. The exception to this rule is when QDRO distributions are paid to children or other dependents.
Traditional, Roth, Rollover, SEP, SIMPLE IRA
IRAs are typically split through “relocation events resulting in divorce.” Through a divorce transfer incident, IRA funds are transferred directly to the receiving spouse’s IRA. Even if the money leaves the original account holder’s retirement plan, neither the account holder nor the receiving spouse will owe federal income taxes. However, if the receiving spouse does not transfer the funds to his or her IRA and instead receives the distribution, he or she will pay federal and possibly state taxes.
Once you get over your divorce, there are many other questions to consider, such as what you want to do next and when you can retire.
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