Presented by Josh Murray
For many couples, retirement assets represent a significant portion of net worth. During a divorce, most couples divide the benefits available in their employer retirement plans and the money they invested in their individual retirement accounts.
Court-ordered division of assets
The rules for splitting accounts are unique to each type of retirement account, but one rule is uniform: To avoid current taxation, the division of the retirement accounts must be done as a result of a court-ordered property division, divorce, or separation agreement.
- Qualified domestic relations order (QDRO): Before a traditional pension, 401(k), 403(b), or 457(b) plan can be divided, a document called a QDRO is needed. A QDRO is a court order that tells the retirement plan administrator how to divide the retirement assets.
- Transfer of account incident to a divorce: IRAs, including traditional, Roth, SIMPLE, and SEP accounts, can also be divided by a court order. Note that without the specific direction of a court-approved settlement, a transfer of part of an IRA to a spouse or former spouse will trigger taxes.
QDROs. Which party is responsible for taxes? It depends on whether a separate account has been set up for the former spouse or whether monies are paid out of the participant spouse’s benefits. With separate accounts, each party is responsible for his or her own taxes. With shared benefits, all taxes are paid by the participant spouse.
One of the advantages of a QDRO is that the 10-percent penalty does not apply for early withdrawals from a 401(k), 403(b), or 457(b) plan made to a former spouse who is younger than 59½; however, the mandatory 20-percent withholding tax does. To avoid the tax on monies intended for IRA rollover, elect a direct transfer to the new IRA custodian.
Divided IRAs. Remember that an informal agreement between spouses to divide individual IRA assets is not recognized by the IRS and will result in taxes. Also, unlike with QDROs, a divorce does not qualify as an exception to the 10-percent early withdrawal penalty for IRA distributions prior to age 59½.
Social security is available to former spouses who were married for more than 10 years. The rules for receiving benefits as a former spouse are the same as for current spouses. For example, if a former spouse reaches full retirement age, he or she will receive the higher of his or her own work-related benefit or 50 percent of the worker’s full retirement benefit.
Consult a professional
Because valuing and dividing a couple’s assets is complex, consider bringing in a third-party professional experienced with valuing retirement plans and employee benefits as an advisor to your attorney or you and your former spouse to help in pursuing an equitable settlement. If you have any questions regarding the article, please contact Josh Murray of Tupler Financial at (908) 203-8811.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Joshua Murray is a financial advisor located at Tupler Financial, Inc, 674 Route 202/206, Building 4, Suite 8, Bridgewater, NJ 08807. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (908) 203-8811 or at [email protected].