Splitting retirement accounts in a divorce

On Behalf of | Feb 25, 2021 | Blog |

People who are getting a divorce in Indiana may have retirement accounts to split up. This can be a fairly complex process depending on what types of accounts they are.

IRAs

Splitting an IRA is fairly straightforward although you do need to follow certain rules. The divorce decree should specify either a dollar amount or a percentage of the IRA that is going to the non-owning spouse. If the spouse who is receiving a portion of the IRA rolls that portion into their own IRA, this will not be considered a taxable event, so the spouse will not incur taxes or penalties. However, if the spouse rolls some of the money into the IRA and takes some in cash, that amount will be taxed. The person will also owe a penalty if they are younger than 59 1/2. It is important for the spouse who owns the IRA to understand this as well because if they simply take out money to give to their former spouse, they will owe taxes and possibly a penalty.

Pensions and 401(k)s

Pensions and 401(k)s are more complex to divide. A document called a qualified domestic relations order must be prepared first. With these types of accounts, the non-owning spouse might be entitled to a portion of the payment benefits or might be given a portion of the balance.

Splitting a 401(k) is somewhat simpler than dividing a pension. As with an IRA, the non-owning spouse’s portion of a 401(k) should be rolled into an IRA to avoid taxes. Pensions have varying rules that must be observed. An actuary could also be needed in some cases to determine what future benefits are worth.

Dividing these accounts in half is not necessarily the only option for couples. One solution might be to have one person keep the retirement account and have the other take a different asset of similar value. However, it will be important to calculate the value of all assets involved accurately, taking into account any taxes or other expenses that will reduce what they are worth. An individual’s divorce attorney may help them ensure they are getting a fair share of the assets.