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How are retirement accounts handled during divorce?

On Behalf of | Jan 31, 2024 | Property Division

One of the most significant financial considerations that many individuals need to address during a divorce is the division of retirement accounts. The property division process in Virginia is based on equitable distribution, which means a fair, not equal, split in the event of litigated divorces.

Understanding how retirement accounts are handled during property division is essential for anyone divorcing in Virginia because it can directly affect both parties’ financial futures.

Retirement accounts are divisible if they’re marital property

In Virginia, retirement accounts accumulated during the marriage are typically considered marital property and are thus subject to division during a litigated divorce. The process of dividing these accounts is not necessarily a straightforward split. It involves legal instruments such as transfer incidents to divorce and qualified domestic relations orders (QDROs). These tools are designed to ensure that the division is handled fairly and in accordance with state laws and the policies of a retirement account.

Transfer incident to divorce

A transfer incident to divorce is a process that allows for the transfer of assets between spouses as part of the divorce settlement without incurring early withdrawal penalties or immediate tax liabilities. This approach is used for non-qualified accounts, such as individual retirement accounts (IRAs). When the transfer of IRA assets to an ex as part of the divorce agreement is treated as a transfer incident to divorce, this means the usual 10% penalty for early withdrawal doesn’t apply, but the recipient may owe taxes when the money is withdrawn.

Qualified domestic relations orders

A QDRO is a legal order required to divide certain retirement plans, including 401(k)s and pensions. A QDRO recognizes an alternate payee’s right, usually the former spouse, to receive a portion of the participant’s retirement plan. The court and the retirement plan administrator must approve this order. It details the amount or percentage of the plan benefits to be paid to the alternate payee and ensures that the division adheres to the plan’s rules and state law. This approach also helps spouses to avoid financial fees and penalties that might otherwise be incurred in the event of a split.

Dividing assets during a divorce is a complex undertaking that becomes even more complicated when retirement accounts are involved. Seeking legal guidance to more effectively engage in this process can, therefore, be helpful in the best ways.