Tips for dividing retirement accounts in a divorce

On Behalf of | Jun 30, 2022 | Divorce |

In Kentucky, a marital estate is divided in an equitable fashion in a divorce. Therefore, it’s possible that you may lose a portion of a 401(k), IRA or other retirement accounts as part of the property division process. However, failing to divide those accounts properly may trigger a taxable event or result in other financial penalties.

Qualified accounts need extra documentation

If you are planning to divide a qualified retirement account such as a 401(k) or 403(b), you’ll need a qualified domestic relations order (QDRO). The QDRO tells the plan administrator that an account is being divided per the terms of a divorce decree and that it is not subject to taxes or other fees. Otherwise, you may have to pay income tax on the amount that is taken out of the account, and if you’re under the age of 59 1/2, you’ll likely be subject to a 10% early withdrawal penalty.

An IRA can be divided without special paperwork

As it is not a qualified account, an IRA can be divided as soon as a divorce decree is issued. However, you may be subject to income taxes and an early withdrawal penalty if you don’t roll the funds into a new retirement account within 60 days.

What can you do with the funds from a retirement account?

Ideally, you will roll any money that you receive from a marital retirement account into one that is in your name. However, if you want, you can simply deposit the money into your personal checking or savings accounts. It’s worth noting that any funds that you receive before the divorce becomes official will be classified as an early withdrawal even if the withdrawal was related to your divorce.

Typically, retirement accounts are considered to be part of a marital estate even if your name isn’t on them. Therefore, you may be entitled to a portion of the funds in that account.