When you divorce after many years of marriage, the asset division process becomes a lot more complex. Dividing retirement accounts is exceedingly difficult, especially when it is a 401(k) or pension.
According to Kiplinger, splitting a 401(k) or pension can result in unwanted tax consequences. It may also require a qualified domestic relations order (QDRO), which the court overseeing your divorce is responsible for issuing. QDROs stipulate that you must receive all or a portion of your spouse’s retirement account. There are two ways in which QDROs function, as explained here:
The shared interest options splits the retirement account in two. Both the account holder and their ex-spouse can exert control over their individual account without affecting the other. This includes the timeline for when to receive benefits from the account, which would otherwise be up to the account holder.
With shared payment, the ex-spouse receives benefits only when the account holder retires. In this case, the account holder controls the timing of the payments, and decides how to divide them (i.e., lump sum vs. annuity).
How to divide IRAs
Because IRAs do not require QDROs, as they are a part of the divorce agreement. In this case, a trustee-to-trustee transfer is the best way to prevent penalties and keep tax costs manageable. Keep in mind that any withdrawals made under 59½ years of age receive a 10% early withdrawal penalty. The divorce agreement must also list the amount or percentage owed to the ex.
While complicated asset division is a factor in all divorces, it is much more so when it comes to retirement funds. Having information on the different options and how they work allows you to make the right decision.