Divorce and Decoding Retirement Asset Division

Stephanie Vokral |

The division of retirement assets can sometimes turn into a big issue during divorce proceedings. For starters, only the funds contributed to a retirement account during the marriage (and their earnings) are considered as marital assets available to split with your spouse, and then you must consider the number of different accounts and tax laws governing them. This can sometimes be a lot to sort out.

Additionally, the type of retirement asset, whether it’s an IRA, 401K, or pension plan, as well as the state in which you are filing determines the rules for splitting the account and associated tax laws. If the definition of these assets or their transfer is mishandled, the consequences can cost you big time! So, how can you keep your divorce from ruining your retirement?


  1. Retirement Accounts and Taxes

It’s a smart idea to do your research before filing for divorce to understand the assets you are entitled to (what is marital, what is non-marital) and their actual value. Unless you have a prenuptial agreement, you are probably legally entitled to part of the balance of your spouse’s employee-sponsored 401(k) or pension plan. The disbursement of these types of payments really depends on the provisions outlined by the specific plan and how you are splitting assets with your spouse.


For example, some accounts will pay out an immediate lump sum while others, like pensions, typically pay out on a monthly basis. It’s important to consider the fact that not all retirement accounts are created equally. A 401(k) may ultimately be of less value in comparison to a traditional savings account or Roth IRA, which are both tax-free. All monies in a 401(k) are, by contrast, are subject to tax, unless there is a portion that is a Roth 401(k) or after-tax contributions have been made.

  1. Splitting with a QDRO vs an IRA


In order to transfer a 401(k) account or retirement pension to a former spouse, you must obtain a qualified domestic relations order, aka a QDRO. This document is a decree issued by a court that recognizes the spouse’s right to retirement funds, but only covers qualified retirement plans under the Employee Retirement Income Security Act (ERISA) like defined contribution and benefit plans. It does not cover IRAs and independent investment accounts.

The most common employee-sponsored retirement plan is a 401(k) plan, which is a defined contribution plan. A pension is considered a defined benefit plan. A QDRO allows your spouse to roll over into their own IRA  part of your qualified plan tax-free and without the IRS early withdrawal penalty. If a pension, this document ensures your former spouse’s employer doesn’t pay retirement out solely to your ex and that you get your share. If you are dividing an IRA account, a Transfer Incident to Divorce can be used to transfer the necessary assets directly to a new IRA account for your spouse. 


To avoid the 10% IRS early withdrawal penalty before age 59 1/2, a retirement plan withdrawal has to be done when you are executing the rollover pursuant to a QDRO by telling the custodian you are taking a withdrawal according to the IRS code 72(t).

  1. Working with a Mediator or Divorce Attorney


A divorce attorney, or mediator who utilize a CDFA ® (Certified Divorce Financial Analyst ®) can help you make informed decisions when you’re dividing marital assets. They can serve as a neutral party, helping to guide both parties to a mutually accepted agreement or work directly with one party advocating for their client to get assets that work best for their post-divorce life . These professionals are trained divorce negotiators and are familiar with divorce law. Seeking the help of a professional can really help speed up the divorce process regardless of whether you choose to litigate or pursue alternative divorce solutions. Working with someone who understands how QDROs work is highly advisable as some employee defined benefit plans are based on a complex set of factors. A CDFA ® with experience will be able to guide you through the process. 

  1. Who's Legally Entitled to My Pension?


While you may be entitled to part of your ex's pension, or vice versa, generally any funds accumulated in a pension prior to marriage are separate assets, not marital. How a pension or retirement account is divided varies by state law. Communal property states divide all martial assets equally while in equitable distribution states (like SC), have it valued and split according to how the parties agree in the marital settlement agreement. If you are in an equitable distribution states like SC and want 100% of your pension, you can negotiate during the settlement process and trade other assets if keeping your pension is a top priority. 


  1. Put Ink to Everything


No matter how amicable your divorce seems to be, make sure any agreements made are drawn up by an attorney and signed by both parties. Remember, a legally binding document is defensible in a court of law. Make sure your marital settlement agreement addresses all retirement and non-retirement accounts/assets.


An accurate assessment of your retirement funds both during and after your divorce will help you move forward and take sole ownership of your assets with certainty. By collaborating with a divorce professional, you can better set yourself up for post-divorce financial success and possibly save on taxes. Are you set up for success? Call The Financial Knot today if you have questions at (803)403-1308 or email us at svokral@thefinknot.com for accurate answers.