Couples getting divorced need to know the rules about dividing retirement assets. Retirement assets include 401Ks, pensions, or an Individual Retirement Account known as an IRA, and are considered marital property. Marital property is subject to division between spouses in a divorce settlement. Follow these steps when dividing your retirement assets.
Gather Information and Value the Assets
Both spouses will need to provide information about their 401(k), pension, and IRA accounts to determine the value. The account statements will show the value of your 401(k) and IRA. The statements will also show the contributions made to the account during the marriage. The marital portion of the 401(k) or IRA subject to division includes contributions and growth that occurred during the marriage. A pension is valued based on age, years of employment, contributions and other factors. Hire an expert to value a spouse’s pension to ensure the valuation is correct.
A Qualified Domestic Relations Order (QDRO) is Required To Divide Certain Retirement Assets
A QDRO is a legal order that outlines how the 401(k) funds or a pension will be divided between the spouses and is typically prepared by an attorney. The QDRO specifies the amount or percentage of the 401(k) or pension that each spouse is entitled to receive. A judge will approve the order and then it is submitted to the plan administrator of the 401(k) or pension plan for implementation. The plan administrator will set up separate accounts for each spouse and the funds are then transferred to each spouse’s separate account.
Dividing an IRA does not require a QDRO
You do not need a QDRO to divide an Individual Retirement Account. The divorcing couple will prepare a letter instructing the financial institution to divide the account. A copy of the divorce agreement and the letter of instruction are all that is needed to divide the IRA. The non-owner of the IRA will have to open a retirement account into which their share of the IRA funds will be transferred.
Tax Implications When Dividing Retirement Assets
It’s important to consider the tax implications of dividing a retirement account. There could be tax consequences for both parties depending on how the transfer is handled. Generally tax consequences can be avoided if the retirement funds are transferred directly into another retirement account. Taxes will be due when the funds are withdrawn by the account owner. Most individuals do not withdraw retirement funds until they are ready to retire.
Consult with a Divorce Attorney
Dividing retirement accounts are complex due to the legal and financial implications. It’s advisable to consult with an experienced family law attorney or divorce mediator to guide you through the process. Many attorneys in Connecticut specialize in preparing QDROs. The divorced couple will hire an experienced QDRO attorney to prepare their legal documents to ensure the transfer of retirement funds is completed in a timely manner after divorce.
Protect Your Retirement Assets When You Divorce
Laws involving the division of retirement assets in a divorce can change over time; therefore, consult with a divorce attorney or divorce mediator when there are retirement assets to be divided. Divorce attorneys are knowledgeable about laws and regulations related to divorce and property division. Dividing retirement assets can get a bit tricky so it’s a good idea to have a skilled, professional divorce lawyer on your side.
Written by Susan Wakefield, Esq.
If you are contemplating divorce or in the process of a divorce, call one of our skilled divorce and family law attorneys. We are here to answer your questions about dividing retirement assets and all other divorce and family law related issues in your divorce. Call us at Maya Murphy, P.C. at (203) 221- 3100 or email JMaya@mayalaw.com or SWakefield@mayalaw.com. Free consultations are available.