What Happens to Your Retirement Account During a Divorce?
Divorce typically brings with it emotional distress, often accompanied by financial battles over splitting up assets, such as the marital home, real estate, and investments. Retirement accounts and pension plans are critical assets, much fought over in divorce proceedings, especially where a dependent spouse without any savings is involved.
Retirement plans being the vehicles for tax-deferred savings, the laws seek to hinder an individual’s access to these funds prior to their retirement. Having said that, there is a legal relaxation in the rules pertaining to the distribution and transfer of retirement accounts within a divorce, as these retirement plans are also considered marital property under divorce laws.
Types of Retirement Accounts
During your divorce proceedings, the most fitting plan to dispose of your retirement savings will depend on the type of retirement account you own, your ex-spouse’s cash flow requirements, and the retirement savings goals of both spouses.
Retirement accounts can be divided into two broad categories:
- Qualified Plans: include 401(k), 403(b), and pension plans
- Non-Qualified Plans: include traditional and Roth IRAs
Whether your investments are parked in a qualified plan like a 401(k) or a non-qualified plan like an IRA, it is critical for you to gain knowledge regarding the effective use of your savings to be able to maintain sufficient funds for your retirement and also achieve an equitable division of assets.
Read on to understand and ensure that you do not lose your rights to benefits or retirement savings in a divorce, in case of both qualified and non-qualified retirement investments.
401(k) Qualified Plans
The option most often used to transfer funds in a 401(k)-retirement account division during a divorce, is a court order called a QDRO (qualified domestic relation order) that allows the transfer and distribution of the 401(k) account funds to the non-participant spouse.
Your ex or the alternate payee does not get a new 401(k) account with this court order, but it grants them the right to receive all or a part of the retirement benefits payable to you the participant.
With a QDRO, you avoid being penalized or taxed for the premature distribution or assignment of your retirement funds. However, the onus still remains on your spouse to determine the means for disposal of funds that were received under this option. Here are the four options that your ex-spouse typically has:
- Let the Funds Remain in Your 401(k)
This option may not be suitable for a non-participant spouse with urgent cash flow needs as it may become more difficult to access the funds in the short term.
- Direct Rollover to Your Spouse’s Individual IRA
If your ex-spouse does not wish to leave the funds in your 401(k) plan in spite of no immediate cash flow concerns, they can choose to roll over the allocated funds to a personal IRA.
- Claim a Lump Sum Amount Prior to Rollover
This is the optimum solution for a non-participant spouse with an urgent cash flow need, but who also wishes to protect a portion of the funds in a retirement plan.
- Cash Out
The recommended option for a non-participant spouse with immediate cash flow needs but over the age of 59 ½, to escape the ten percent penalty that the distribution amount will attract otherwise.
Non-Qualified Plans
If your retirement investments are in a non-qualified plan like an IRA, you and your ex-spouse can select two basic options to divide your retirement assets during a divorce.
Under the Internal Revenue Code §408(d)(6), the transfer of an interest in a traditional IRA from you to your ex-spouse by a maintenance decree or a decree-related document during your divorce proceedings is tax-free.
The two methods most often used to transfer IRA assets to your ex-spouse are:
- A Name Change on the IRA
In case you wish to transfer all the assets, you can simplify the transfer just by a change of name on the IRA, from your name to your ex-spouse’s name.
- Direct Transfer of IRA Assets
Under this method, the trustee of your traditional IRA, under directions from you, transfers the concerned assets directly to the trustee of a traditional IRA, whether existing or new, created in your ex-spouse’s name.
Correlating with this, if your ex has the permission to keep their portion of the assets in your existing IRA, the trustee can transfer your assets to an existing or new traditional IRA created in your name.
Reach Out to a Reputable Alabama Divorce Attorney
The process of dividing retirement assets in a divorce can prove to be challenging. In an Alabama divorce, you can count on the family law attorneys at Smith Law Firm, who can fight aggressively for your rights, using our deep understanding of the different areas of family law, and our profound commitment to you as a client.
Speak to one of our seasoned divorce attorneys for the right legal advice and guidance, to seek and find an equitable solution that fulfills your future needs while protecting your present interests. Call us today at (334) 377-1674 or contact us online for a consultation with one of our attorneys.
