Whether you’re still decades away from retirement when you divorce or it’s just around the corner, it’s crucial to protect the retirement savings you’ve worked so hard for. It can make all the difference between retiring on your terms and living a comfortable life and not being able to afford to retire.
Various types of retirement accounts are handled differently in divorce. How yours are divided (if they are) depends on whether they’re considered separate or marital property.
When is a QDRO used?
If you’ve started doing some research on property division in divorce, you’ve likely read about qualified domestic relations orders (QDROs). These are court orders used to split both spouses’ employer-sponsored retirement plans like 401(k)s.
If you or your spouse is a federal government employee, you likely have a Thrift Savings Plan (TSP). These are often divided using a similar type of order called a retirement benefits court order (RBCO).
These orders allow spouses to transfer money from their savings plans without penalties. The plan administrator is allowed to enforce them.
What about IRAs?
If you’re like most people, you’ve probably had more than one job with an employer-sponsored retirement savings plan. Therefore, you’ve likely moved that money into an individual retirement account (IRA) after you left your job so you didn’t have to pay taxes on it.
Rollover IRAs held at financial institutions or investment management companies aren’t included in QDROs. However, the tax laws allow divorcing couples to transfer assets “incident to the divorce” without early distribution penalties or capital gains taxes.
Determining separate vs. marital property
A key factor in determining how retirement accounts are divided is whether the funds are separate or marital property. For example, if you have a rollover IRA comprised only of money you had in a 401(k) before you got married, and you added no additional joint funds to it, that would likely be ruled separate property and you wouldn’t have to split it (at least not here in Virginia). However, if you have been making contributions to it annually from a joint account with your spouse, that makes it marital property.
It’s a lot to think about at a time when you may feel inundated with financial decisions that will affect the rest of your life. Don’t go it alone. In addition to having experienced legal guidance, it’s wise to have your own trusted financial and tax advisors.