How to Split Retirement Accounts in Divorce

Learn about the rules for dividing IRAs, 401(k)s, and other retirement plans in divorce, how to collect your share of these accounts—without running afoul of the IRS—and how to get help.

By , Retired Judge

Besides a home, retirement accounts are often a couple's most valuable assets—particularly for those who've been married a long time. When a marriage ends, those accounts will probably be split between the spouses. There are different ways to get that done, but laws and government regulations control the options. If you don't follow these rules carefully, you could face a financial nightmare—especially if you are divorcing late in life. Here's an overview of what's involved in dividing retirement accounts in a divorce.

Basic Rules of Property Division

While are there are specific rules that apply to retirement accounts, the basic rules of property division in divorce still apply to these assets. That means that if you want to know which spouse will get all or part of a retirement account, you first need to know the answer to two questions:

  • Is the retirement account marital property or separate property? In a divorce, only "marital property" is divided. The spouses keep their own separate property. As a general rule, contributions to one spouse's retirement account (along with other increases in value) before the marriage are the separate property of that spouse and wouldn't be divided in the divorce. In some states, the same would be true of contributions and increases after the couple separated. The part of the retirement account that grew during the marriage is marital property.
  • How is marital property divided in your state? Under the law in "community property" states, spouses jointly own all assets they acquire during the marriage, so courts almost always divide that property 50-50. In "equitable distribution" states, courts divide marital property based on what's fair under the particular circumstances of each case. So "equitable" doesn't necessarily mean "equal."

Couples can decide for themselves how they will divide their marital assets, with a divorce settlement agreement. But if their agreement doesn't follow the basic rules of property division, a judge might decide the settlement is unfair and refuse to approve it.

Types of Retirement Accounts

There are several types of retirement accounts, but they can be broken down into three main categories:

  • Individual retirement accounts (IRAs) are available to some individuals who want to save for retirement and enjoy some tax benefits in the process. There are different kinds of IRAs, including traditional, Roth, and SEP IRAs. Each has its own rules on when people can contribute to these accounts, how much they can contribute each year, and the tax consequences.
  • 401(k)s and other defined contribution pension plans. These employment-based plans allow employees to contribute a percentage of their earnings to the plan. Sometimes, employers will make a matching contribution, usually up to a limit.
  • Defined-benefit pension plans. These are also employment-based retirement plans. Unlike IRAs and 401(k)s, however, the amount paid out after retirement doesn't depend on individual investment returns. Rather, the retiree receives a set amount of benefits based a formula that includes things like length of employment and salary. Many government employees and members of certain unions qualify for pension plans.

What Happens to Retirement Funds in Divorce?

Whether you live in a community property state or one that uses equitable distribution, retirement accounts are considered property that can be divided in a divorce—but only the portion of those accounts that is marital property.

How Do You Calculate Marital Property in Retirement Accounts?

Calculating the marital portion of retirement accounts can be complicated. It depends on the type of account or plan and when contributions went into the account.

When one spouse opened an IRA or started participating in a 401(k) during the marriage, the entire account balance at the time of divorce (or, in some states, when the couple separates) is marital property. If a spouse contributed to a retirement plan before getting married, the marital portion of the account would typically be the difference between its value at the start of the marriage and its value when the marriage ended (or on the separation date, when that's the rule).

With defined-benefit plans, you'll almost certainly need an expert (like a pension actuary) to calculate each spouse's interest in the pension.

How Do You Collect Your Share of Retirement Accounts After Divorce?

There isn't one set rule for collecting your share of retirement accounts in a divorce. For example, if you're what's known as the "alternate payee" (meaning the spouse who didn't open an IRA or wasn't the employee with a 401(k) or pension), you could agree to get a lump-sum payment for your share of the account. Or you could wait until the plan starts paying retirement benefits down the road and get a share of those benefit payments.

In some situations, it might make sense to agree that the spouse with the retirement account or plan (often called the "participant") will keep it, while the alternate payee will get additional marital assets to make up for that spouse's interest in the retirement funds. Here's an easy example: Let's say the marital portion of your spouse's 401(k) is worth $400,000, and the two of your own a mortgage-free home worth the same amount. Rather than hassling with splitting both the retirement account and the value of the house (which might involve selling it against your wishes), you could simply agree to a trade-off. Your spouse keeps the 401(k), and you keep the house.

Of course, the trade-off approach is usually more complicated than this example, and it may or may not make sense depending on the specifics of your situation and the assets involved.

Requirements for Dividing Retirement Accounts

It's critical that you closely follow IRS rules on retirement accounts when you're dividing these assets in your divorce. Otherwise, you could wind up paying penalties for withdrawing retirement funds too early—or the account managers might not even honor your settlement agreement.

For employment-related retirement plans—such as 401(k)s and defined-benefit pensions—you must have what's known as a "Qualified Domestic Relations Order" (QDRO) to divide the plan in a divorce. (I.R.C. § 414(p)(1)(B). (2021).) It doesn't matter whether a judge decides how the accounts will be split, or you and your spouse come to an agreement—on your own or with the aid of mediation. Either way, you'll still have to get a QDRO (more on what that entails below).

You don't need a QDRO to divide an IRA. However, you'll have to pay taxes on the transfer of IRA funds from one spouse to another unless it meets the requirements for a "transfer of account incident to divorce." (I.R.C. § 408(d)(6).) This usually isn't an issue, because the divorce judgment or decree will state that. But you'll typically need to submit a special form to the bank or investment firm that holds the account, along with a copy of your divorce decree. Ordinarily, couples divide IRA funds by transferring one spouse's share into another IRA account in that spouse's name.

If you or your spouse has been in the U.S. military long enough to qualify for a pension, be aware that there are complex rules that control dividing military pensions.

What's Involved With a QDRO and How Do You Get One?

The contents of your QDRO will depend on the requirements of the particular pension plan. Plan administrators often provide a sample document, but that will have to be adapted to address the facts of your case.

There are some basic elements to any QDRO, however. Federal law (I.R.C § 414(p) (2021)) spells out detailed requirements for what a valid QDRO must include and what it may not require the plan to do. Because these orders can be quite lengthy and complicated, there are lawyers and other experts who specialize in preparing QDROs. In the interest of accuracy and saving time (and sometimes money), most spouses or their lawyers prefer to have these specialists work with the plan administrator and prepare the order.

The U.S. Department of Labor provides an online publication that explains QDRO's in detail.

Get Expert Assistance if Possible

Because of the relative complexity of dividing retirement accounts, it's probably in your best interest to hire an attorney or financial advisor familiar with the procedures involved. Trying to handle it on your own could be extraordinarily time-consuming, prolong the divorce, and—if you run afoul of IRS requirements—end up costing you a lot amount of money.

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