Retirement accounts are often among the largest assets divided in a divorce. While a 401(k) and an IRA may look similar on a financial statement, they are not divided the same way.
Understanding the rules before transferring retirement assets can help avoid unnecessary taxes, penalties, and costly mistakes.
Is the Entire Retirement Account Marital?
Not necessarily.
If retirement savings were accumulated both before and during the marriage, the account may contain both marital and separate property. Contributions made during the marriage—and the investment growth associated with those contributions—may be treated differently from money that existed before the marriage.
Determining the marital portion can require reviewing historical account statements and contribution records.
Dividing a 401(k): The QDRO
Employer-sponsored retirement plans such as 401(k)s are generally divided using a Qualified Domestic Relations Order (QDRO).
A properly prepared QDRO instructs the retirement plan to transfer an agreed-upon portion of the account to the other spouse. When handled correctly, the transfer itself generally does not create an immediate tax liability.
The details matter. The agreement should clearly address the amount or percentage being divided, the applicable date, and how investment gains and losses are treated.
Dividing an IRA: No QDRO Required
IRAs are handled differently.
Instead of a QDRO, an IRA is generally divided through a transfer incident to divorce pursuant to the divorce decree or related agreement.
This distinction is important. Simply withdrawing money from an IRA and giving it to a former spouse can create taxes—and potentially penalties—that could have been avoided with the proper transfer.