Retirement accounts earned during the marriage are often marital property. Dividing them correctly avoids taxes and penalties.
What can be divided
- Workplace plans such as 401(k)s and 403(b)s.
- Defined-benefit pensions.
- IRAs.
- Government and military pensions under special rules.
The QDRO
Most employer plans require a qualified domestic relations order, a court order that tells the plan how to divide benefits. A transfer under a valid QDRO is generally not taxed or penalized at the time of transfer, though later withdrawals may be taxed. IRAs are typically divided by a transfer incident to divorce rather than a QDRO.
Common mistakes
- Withdrawing money instead of using a QDRO, which can trigger taxes and penalties.
- Forgetting to divide loans or survivor benefits.
- Not valuing a pension correctly.
- Delaying the QDRO until after the account owner dies or changes jobs.
Steps
- Request plan statements and the plan's QDRO procedures.
- Decide the amount or formula and date of division.
- Have a lawyer or QDRO specialist draft the order.
- Submit it to the plan for approval.
- Keep copies of everything.
Frequently asked questions
Is the other spouse's retirement protected?
Not from division. Marital portions are generally divisible.
Are taxes owed on a QDRO transfer?
Generally not at transfer, but withdrawals are taxed later.