Retirement Plans and Divorce

Divorce has become relatively common in today’s world. Whether you expect your divorce to be quick and easy or long and complicated, it is critical for those with retirement plans to know how those assets may be transferred or divided upon divorce without triggering unexpected tax consequences and penalties.

IRAS
Transfers incident to divorce are tax-free…if done correctly. IRAs are governed by state law. Thus, an official divorce decree, court order or legal separation instrument is needed before IRAs may be split between a divorcing couple so the split is not deemed a taxable transaction. The divorce judgment or divorce settlement agreement should contain specific language that addresses the splitting of the IRA(s). Absent an official divorce decree, court order or legal separation instrument, a split would be considered a taxable distribution for the IRA owner.


401(K)S, CERTAIN PENSIONS AND OTHER ERISA GOVERNED RETIREMENT PLANS
Qualified Domestic Relations Orders (QDROs) are not required to accomplish a tax-free split of an IRA. However, QDROs are generally required for splitting federally governed retirement plans such as 401(k)s and certain pension plans. They are basically orders that determine a former spouse’s interest in the retirement plan. All QDROs must comply with ERISA specificity requirements.

Every situation is different and state and federal laws vary. It is very important to discuss the division of your retirement plan assets with your personal family law attorney or other qualified professional if you have a retirement plan(s) and are facing or contemplating divorce.

IMPORTANT REMINDER: After you are divorced, don’t forget to immediately update the beneficiary designation forms for your retirement plans. Assuming your ex-spouse is no longer an intended beneficiary, you will need to fill out new beneficiary forms to remove your ex-spouse.