How to properly divide retirement assets in a divorce

On Behalf of | Aug 3, 2021 | Blog, Divorce |

Typically, a retirement account is classified as a joint marital asset that is subject to Minnesota property division laws during a divorce. This is generally true even if the account is held in just one person’s name. The process by which such an asset is divided depends on if it is classified by the IRS as a qualified plan.

Qualified plans must be divided through a qualified domestic relations order

If you have a 401(k) or 403(b), you are in possession of a qualified retirement plan. Therefore, to divide the asset without triggering a taxable event, your divorce attorney will need to craft a qualified domestic relations order.

It’s important to note that the QDRO is separate from the divorce decree itself. This document tells the plan administrator that a withdrawal is occurring pursuant to a divorce. Therefore, there is no need for a 10% early withdrawal penalty.

After the account is divided per the terms of the QDRO, you have up to 60 days to put your share of the money into an IRA or an existing 401(k). If you fail to do so, you’ll likely need to pay income tax on the amount that you received in the settlement.

How should an IRA be allocated?

Language outlining how to divide an IRA can be included in the divorce decree itself. Generally speaking, you won’t have to pay an early withdrawal fee assuming that you wait until after the divorce is finalized to take your share of the account’s proceeds. An attorney may be able to provide more information as to how you can divide this asset without triggering a taxable event.

Ideally, you won’t accept a divorce settlement that doesn’t allow you to maintain a reasonable lifestyle as a single individual. For most people, the ability to save for retirement is part of maintaining a reasonable lifestyle.

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