A retirement account may be one of the most valuable assets to be divided in a divorce case. The amount of your spouse’s retirement account you’ll receive will depend on the characterization of the property as marital or separate property, the value of the account, and other factors.
Retirement Accounts as Marital Property
Marital property includes most property acquired by both spouses during the marriage. If your spouse made elective deferrals to a 401(k) account or put money in an IRA while you were married, some of the retirement account funds are marital property.
If a spouse also contributed to the account before marriage, then only a portion of the account will be marital property. Pension plans, defined benefits plans, and other types of retirement plans all have special rules for determining how much of the accounts is marital property, and how much remains separate property.
You may not be aware of how much money your spouse has been putting into their retirement plan during your marriage, but you can determine this by looking at the dates the contributions were made.
Taxes and Other Issues
The money in an IRA, 401(k), or most other types of defined contribution plans is made up of pre-tax dollars. You must consider the taxes you’ll end up paying on these amounts when valuing them during a divorce. Most other assets, such as your home, cars, or bank accounts, can be transferred tax-free.
If you are receiving a portion of your former spouse’s retirement account, make sure you consult your divorce attorney about how to complete the transfer. If your former spouse doesn’t execute the transfer properly, it could create a significant tax liability and penalties.
If the funds are in an IRA, you can generally transfer the money into your own IRA. Qualified plans, such as 401(k) plans, will require a qualified domestic relations order (QDRO).
Failure to get a QDRO or properly initiate the transfer could lead to the following consequences:
- Taxes will have to be paid on the full amount of the distribution.
- An early-distribution penalty of 10% may also be assessed.
Contact a divorce attorney if you have questions about how to divide a retirement plan during your divorce.
At King Law Offices, we understand the challenges involved in any family law matter. Our goal is to help guide you through this process and listen to your concerns. Come visit us at one of our multiple office locations throughout North and South Carolina.