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How Are Retirement Accounts Split in a Divorce?

How Are Retirement Accounts Split in a Divorce?

Knowing how to divide your estate can be difficult when you’re getting a divorce. If you and your spouse have been saving for retirement together, some things might make it difficult to divide these accounts fairly. Understanding the laws that govern retirement accounts and how they apply to your situation is essential. In this article, we’ll discuss how retirement accounts are divided in a divorce and what you can do to ensure you’re getting your fair share.

Retirement Account Contributions and Growth

Retirement accounts are a way to save money for the future. Retirement accounts are typically held at a financial institution or in an IRA or 401(k) account. They are invested in stocks, bonds, and other securities that you hope will grow your money over time.

Retirement account contributions and growth are marital assets. This means that any contributions or gains made during the marriage are subject to division in the event of a divorce. However, if one spouse does not work, they would only have access to the portion of the pension accrued during their marriage.


Divorce Decrees and Property Settlement Agreements

Divorce decrees and property settlement agreements are the two documents that can outline how retirement accounts are split in a divorce. Both of these documents will be prepared by the attorney assigned by the judge. These documents will outline how you want to divide your retirement accounts and any other assets you may have together.

The court will evaluate each spouse’s financial situation and compare it to their assets, liabilities, and income. The court will use these factors to determine what percentage of the total value of all assets should be awarded to each spouse. Both documents should include an itemized list of all shared assets and liabilities, including bank accounts, investments, debts, real estate properties, and other forms of property.

A divorce decree or marital property settlement agreement can order the division of an individual retirement account. The court must ensure that the division of the IRA complies with all applicable federal and state laws. Additionally, these agreements must include a Qualified Domestic Relations Order that meets the specific requirements of the IRC.


Retirement Account Splits Require a Qualified Domestic Relations Order

A Qualified Domestic Relations Order (QDRO) gives the plan administrator permission to distribute a portion of a 401(k) or other qualified plans to a former spouse, a child under the age of majority, or another dependent. It validates and gives legal force to the terms of a divorce decree, judgment, or property settlement agreement approved by the court regarding the division of marital assets. The QDRO is a critical document that protects the participant and alternate payee by ensuring that the money is distributed under state and federal laws.

You must treat payments received under a QDRO from a retirement plan in the same manner as if you were a participant in the plan. Additionally, your basis in the account will be calculated as though you were a participant. You, as the ex-spouse of the plan participant, are also free to transfer the funds from the plan to another retirement vehicle, such as an IRA. As such, it is essential to understand the purpose of a QDRO when dealing with the division of marital assets in divorce proceedings.


Retirement Accounts in a Prenuptial or Premarital Agreement

A prenuptial agreement can be invaluable when dealing with retirement account splits during a divorce. It provides a clear plan for dividing retirement accounts and pensions before the divorce is finalized. Additionally, a prenuptial or premarital agreement can override state law. However, a spouse can challenge it and get it thrown out, such as if it is found to be the product of duress or fraud.

For a prenuptial or premarital agreement to be enforceable, both spouses must have received independent legal counsel, and full disclosure of all assets must have been made. The agreement must also be fair and reasonable, meaning it should not impose an undue burden on either party.


Receiving Money from an Ex-Retirement Spouse’s Plan

The type of retirement plan or account divided will determine how distributions will be made to you or your ex. In addition, exactly how distributions will be made should be spelled out in the decree or property settlement agreement. To determine how your retirement plan or account will be split, carefully review the decree or agreement and any accompanying documents, such as the plan’s summary plan description.

For example, the 401(k) plan administrator may decide how to handle the distribution of benefits. Some plans let the spouse receiving the funds start their account within the plan. This allows the funds to remain in a tax-deferred account and usually allows them to take advantage of any investment options or other features available through the plan. Meanwhile, others necessitate a distribution, or the money is rolled into an individual retirement account.

Additionally, money from an IRA is usually given to the spouse, who will receive the funds by opening a new IRA in their name. Others allow the funds to be deposited into an existing IRA in their name if they have one.

Bottom Line

There are many factors to consider during a divorce. However, retirement planning is especially important because you will depend on this money during your retirement years. When getting a divorce, there is no “one size fits all” approach to dividing assets, so if you want to know exactly how much your spouse will receive from selling your home and other assets, you should talk to an attorney. Trapp Law LLC can help you ensure that all your rights are protected during a divorce, including the right to receive a fair portion of retirement benefits.