Splitting a married couple’s assets is often difficult during divorce. However, property division of retirement assets has its own unique concerns. Specific rules govern dividing 401(k) plans, pensions and individual retirement accounts. Annuities are also difficult, and couples may have to trade assets to avoid cashing in an annuity and losing significant value.
A qualified domestic relations order is required for 401(k) plans and pensions. A QDRO is a judicial decree that sets forth a spouse’s right to receive any part of an account owner’s qualified plan. These orders are submitted to plan administrators and then plan assets may be transferred to the spouse’s name. Dividing a 401(k) plan with a QDRO allows a one-time tax break. Rolling these funds immediately into a new IRA also eliminates taxes or penalties. Beneficiaries must be reviewed to assure that there are no unintended recipients, such as the soon-to-be former spouse.
IRA division is handled through a divorce decree or separation agreement and not through a QDRO. IRA division may also have tax penalties. Withdrawing cash is taxable and has a 10 percent early withdrawal fee if the spouse is under 59-years-old.
Because assets have different values, some trade-offs may be recommended. For example, a spouse awarded a traditional 401(k) will owe taxes on any distributions, so it is not equivalent to receiving Roth IRA assets, which are funded with after-tax contributions. Roth IRAs are often separated from other retirement assets and divided equally.
Social Security benefits are not a marital asset and may not be divided. Because the higher-earning spouse gets a larger benefit, the couple may agree to pay monthly support payments or trade-off assets, such as an investment account, to make up this difference.