If you and your spouse are getting divorced and either of you have retirement plans, you may be required to share a certain amount of these assets. Whether you are receiving or giving up funds, it is important to understand how asset division applies to retirement investments.
Handling these assets properly is crucial to ensure the correct party pays applicable taxes.
Retirement plans are community property
If you had a benefit plan prior to your marriage, it is your property up until the date of marriage and does not require division. All property that either spouse acquires during the marriage is considered community property. This includes investment plans and retirement savings. These can turn out to be the assets with most value in a divorce. Examples of retirement plans that apply to divorce include:
- Deferred pensions
- Stock options
- State pension plans
- Military pension plans
- Civil service and federal employee retirement plans
- County pension plans
The entire amount of money accumulated in these accounts during marriage is divided regardless of classification.
How 403(b) and 401(k) plans are divided
In most cases, you must submit a Qualified Domestic Relations Order (QDRO) to the plan administrator. This filing allows the allocation of benefits to the ex-spouse or another dependent. As long as you report QDROs accurately and correctly, they are tax-free. If a transfer is not a proper QDRO, it may be subjected to taxes and penalties.
Dividing IRAs in a divorce works differently. The process of dividing this plan is known as a transfer incident to divorce. Tax will not be assessed on this transaction. The changing of funds can be determined as a rollover or transfer. The recipient of these assets will assume responsibility for future transactions, distributions and taxes.
Designate your beneficiary
Updating or changing the beneficiary of your retirement plan is important to ensuring the benefits are properly divided. Your ex-spouse is likely not listed by default. Contacting your employer or plan administrator for beneficiary forms is key. An attorney can assist you in ensuring your retirement assets are dispersed in the correct manner.
Dividing your retirement assets during a divorce is easy when you know your responsibilities and report everything accurately. If you fail to pay attention to the details, it can result in complications and expenses, particularly if there are large amounts of money in the plans. If you want more information on how to correctly divide your retirement assets, consult a divorce attorney.