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Like all family and property law, divorce is a highly state-specific process. How you will handle a divorce and protect your assets, and what constitutes individual vs. shared assets, will depend entirely on your jurisdiction. As a result, how retirement accounts are treated during divorce proceeds can vary widely from state to state.
The first step is typically to separate personal from marital assets. In most cases, you retain assets and debts that predated the marriage, and you split assets and debts that you acquired while you were married. This is far more complicated than it sounds, as it’s very easy for assets to comingle and share accrued value during the course of a marriage.
For example, say that you are 55 years old with $800,000 in a 401(k). The most important part of this will be where you live and how much of the account was earned during the marriage. From there, a divorce court will typically divide up the 401(k) based on your household’s overall assets and, in particular, any other retirement accounts held by you or your spouse.
While a complete discussion of this issue is far beyond the scope of a single article, we’ll explore some of the most important factors to consider below.
If you need financial advice during or after a divorce, consider connecting with a fiduciary financial advisor today.
Divorce courts typically do not give special status to a couple’s tax-advantaged retirement accounts. A judge will treat these portfolios as a standard financial asset, splitting up each account based on the overall distribution of assets, the parties’ relative financial status and an account’s marital vs. personal status, among other factors.
There is no tax penalty for taking early withdrawals in order to transfer retirement assets between divorcing spouses. This is typically done through a “Qualified Domestic Relations Order” or a “Transfer Incident to Divorce” depending on the nature of the account.
You can move these funds directly into another qualifying pre-tax account without triggering income taxes or an early withdrawal penalty.
For example, say that you have $800,000 in a 401(k), of which you had $300,000 in the account when you got married. Typically, you will keep that $300,000. The remaining $500,000 might be considered a marital asset and be distributed between you and your spouse. You might then agree to split that money 50/50, and draft a QDRO to remove $250,000 worth of assets from your 401(k) and move them to an account of your spouse’s choosing.
