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How will retirement plans be divided in your upcoming divorce?

On Behalf of | Mar 15, 2021 | Divorce

No doubt you will have many questions as you approach the property division phase of your divorce.

Among them will be questions concerning the retirement accounts you and your spouse own. How will you split these important assets?

Need for a QDRO

A major objective in dividing retirement accounts is to minimize taxes. Your 401(k) will need a QDRO or Qualified Domestic Relations Order to ensure correct distribution with your soon-to-be-ex. With this legal document in place, no taxes or penalties will be taken due to early plan distribution. You will need a separate QDRO if you have a pension or company-sponsored plan.

Tax consequences

Avoiding taxes is not always possible. Keep in mind that you make pre-tax contributions to your 401(k) and your traditional IRA. However, you pay income tax before making a contribution to a Roth IRA. Depending on the type of account you have, taking money out may come with certain tax consequences.

Distribution options

You have some options when the time comes for you to receive a retirement account distribution. You can request a direct transfer and roll the assets into a retirement plan of your own. However, you can also cash out the portion allotted to you or defer taking a distribution until the owner of the retirement account retires, in which case you would presumably receive a larger share.

About beneficiaries

No matter how you decide to take retirement account distribution, remember to update your beneficiaries. Also, if you still have young children and they are your primary beneficiaries, you might consider establishing a revocable living trust, which will then become a beneficiary of any account you create for the retirement proceeds.