There's no denying that divorce can be emotionally taxing, particularly when it comes time to divide assets. One issue that often arises concerns whether retirement accounts will be split.
If you're planning for retirement and wonder if you're eligible to receive part of your soon-to-be-ex's retirement account, the answer is "maybe." It depends on a few factors.
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Timing is everything
When the account was funded matters. Here's why:
Account acquired before the marriage
Typically, assets acquired before the marriage or through inheritance are classified as "non-marital" and remain with the original owner. Let's say your ex funded a retirement plan before you were married. You're unlikely to get any of that money.
The same is true if they inherited an IRA or other retirement account -- if it was kept separate and never mixed with marital funds. You may have a stronger claim if the account was commingled with marital assets.
Assets acquired before marriage or through inheritance may be classified as non-marital and normally remain with the original owner.
Accounts acquired during marriage
In most states, assets -- including retirement accounts -- built during marriage are considered "marital property" and can be divided between spouses during a divorce. How they're divided may depend on whether you live in a community property state or an equitable distribution state.
Community property states
When there's a divorce in one of the nine community property states, all marital property is typically divided 50/50 between divorcing spouses. In other words, you may be entitled to half the value of your ex's retirement account. However, it's important to work with an experienced family law attorney to learn how much you're entitled to in your state.
Equitable distribution states
The other 41 states operate under equitable distribution strategies, meaning that courts in these states seek the fairest solution for all parties. However, "fair" doesn't mean everything will be equally distributed.
Type of retirement account
How a retirement account may be divided depends on the type of account. Here's how they differ:
401(k)s, pensions, and other qualified retirement plans
Qualified retirement plans, such as 401(k)s or pensions, are normally divided through a qualified domestic relations order (QDRO). A QDRO is a simple legal document that allows someone other than the original account holder to receive a portion of the benefits from a retirement plan.
Through a QDRO, money can be transferred without requiring your soon-to-be-ex to pay the early withdrawal penalties that would normally apply. If you receive money, you can avoid paying taxes on it by rolling it over into another qualified retirement plan.
Traditional, Roth, Rollover, SEP, and SIMPLE IRAs
IRAs are generally divided through a "transfer incident to divorce" that directly moves the funds from your ex's account to your personal IRA. Even though money will be leaving their retirement plan, neither of you will owe federal income taxes. However, if you decide to take a cash distribution rather than roll the money into your IRA, you will owe federal and possibly state taxes.
Following a divorce, you'll have other issues to contend with, such as how to arrange your finances and when you're going to retire. The goal is to ensure you're left with a fair settlement that allows you to plan for the future.
