Dividing marital assets in divorce is never an exciting prospect. Find out how property is…
Learn the basics about dividing a retirement account in a divorce with Doyle Law Group.
Divorce and the Division of Assets
How is a 401(k) divided in a divorce settlement? Generally, the rule is that all assets in divorce proceedings are divided equally. This is unless there is a call for the contrary, which can come in the form of a court order that may seem to suit one party more than another. Often this is to meet the needs of one party's accommodation. The idea of any division of assets is to achieve a “clean break.” In a clean break, both parties are granted an even financial separation by the Court.
If this is not feasible, the Court has the power to order “spousal maintenance.” Spousal maintenance exists for a set period to achieve a clean break in the future. Most financial settlements aim for an immediate clean break. An exception is separations that include some form of child support arrangement. But where do retirement accounts come into this separation, and how can the Doyle Law Group help?
We can help! After reading this post, you will know everything you need to know before moving into divorce proceedings. You can begin by reading our guide on how assets are divided during a divorce.
Dividing Retirement Accounts
Agreements Between Spouses
A primary method of dividing retirement accounts is a divorce settlement agreement. In a divorce settlement agreement, the couple decides how marital assets are divided. If a court decides the agreement doesn't follow the basic rules of property division, it may be disapproved.
Alternative Dispute Resolution
Alternative dispute resolutions (ADRs) are different methods of resolving disputes. This can include neutral evaluation, mediation, or arbitration. Dividing retirement accounts with ADR could save time and money as opposed to going to court. However, this can be a less professional experience. Moreover, this could lead to an unfair settlement for you or your former spouse. A result of this could be going to court anyway.
The Dividing of Retirement Accounts in Court
Initially, a judge will decide what assets are able to be divided. For a retirement account, this is a decision made on what percentage or amount is available. This amount is then able to be claimed by yourself and your former spouse.
If your 401(k) has been contributed to before, during, and after the marriage, a calculation will need to be made. This is to determine which contributions classify as part of the “marital property.” Contributions to a retirement plan during the marriage are marital property and will be divided.
The dates that go into this calculation can vary. This is because they rely on whether your state has laws about dates of separation and premarital contributions.
What Is a Qualified Domestic Relations Order, and How Is It Related to a 401(k)?
After the calculation has been carried out, the court will issue a court order. This will include specific details of the division. Each spouse and their divorce attorney will create a qualified domestic relations order (QDRO). This order will instruct the retirement plan administrator to divide the assets within. A divorce attorney might hire their own QDRO company to create the final document which includes things such as:
- State-specific language
- Case-specific details
What happens after both parties have approved the QDRO? Each spouse and their divorce attorney will sign and return the document to the court. After the document has been signed by a judge, the QDRO is mailed to the retirement plan administrator. Withdrawing money from your or your spouse's retirement accounts can incur charges. To prepare for this, you are able to request the judge to include payment requirements in your divorce order.
If you don't currently have a divorce attorney, but think you might need one, consider Doyle Law Group. We're a law firm of committed, experienced Raleigh divorce lawyers. We possess over 20 years of experience with North Carolina divorce law.
Dividing an IRA Account
Other retirement accounts such as an IRA do not need to undergo the QDRO process. Alternatively, a couple can request a transfer of assets from an IRA plan administrator. This will move the required assets into the spouse's retirement account.
Another option would be for the owner-spouse's IRA to be renamed to represent the other spouse, with the funds necessary left intact while the remainder is transferred into a new account.
4 Things to Know about Splitting Up a 401(k) in a Divorce
1. Distribution Options
For a receiving spouse on the other end of a 401(k) distribution, there are primarily three options to receive this money.
- Option 1 is to transfer the assets from your payout into your own retirement accounts or retirement plan by way of a direct transfer. If this is done, there will be no penalty on that money.
- Option 2 would be for the receiving spouse to accept their share once the account owner retires. If this is done, the spouse on the receiving end can choose from two options. One is whether to take regular payments, or two is to have their share paid in one transaction as a lump sum payment.
- Option 3 is simply for the receiving party to cash out their balance. This is the easiest way to immediately access the money owed to them. However, if the receiver is not 59.5 years of age, they may be liable to pay taxes and owe income tax on it. Also, this can come along with a 10% early withdrawal penalty.
2. Coming to an Independent Agreement
There are ways of creating an independent agreement in regards to dividing a 401(k). State laws may detail your spouse's entitlement. Though, an independent agreement can and will save both parties time, money, and effort.
However, a financial advisor could still prove useful. A certified financial planner has experience and expertise in dividing retirement savings. This is useful in ensuring your proceedings are simple for both you and your spouse.
3. You Need a Court Order to Divide a 401(k)
A judge in court would need to sign off on a qualified domestic relations order. This document confirms that each spouse has a right to a portion of the money held within.
This order is crucial for the account owner. This is because it can stop the owner from having to pay taxes or a withdrawal penalty upon distribution.
4. The Rules Surrounding Divisions Vary by State
How marital property division is handled can depend on your state. In “community property states,” spouses jointly own all assets acquired during the tenure of marriage, including retirement assets, and a court will mostly ensure that property division is 50/50. In “equitable distribution states,” the Court divides marital assets based on what's fair under specific circumstances pertaining to each case.
It's important to know that equitable distribution is not always “equal.” Check the property division laws of your state here. If you'd like to learn more about equitable distribution, especially in the state of North Carolina, our guide to Social Security Benefits and Retirement Accounts in a divorce will help you determine what equitable distribution consists of.
To learn more about how we can help you, schedule a consultation via the form below, or call (919) 301-8843, and a member of our team will happily assist you.