Dividing retirement accounts during divorce

Division of assets is one of the most argued elements of divorce. Whether a couple was married for two years or 20, property adds up fast and it doesn’t split neatly down the middle.

Maryland is an equitable distribution state, meaning the property a couple acquires during marriage will be split in divorce fairly, though not necessarily a perfect 50-50. While there is such a thing as separate property, which is owed by just one of the parties, there are usually special considerations for this.

One of the biggest assets

Retirement accounts are usually one of the biggest assets a couple owns. Sometimes it’s a work-sponsored 401(k) where just one partner’s name is attached, and sometimes it’s a jointly owned IRA. As anyone with a retirement plan knows, there are many different types of accounts and each has unique rules about withdrawing those funds.

Marital partners share income, which makes a retirement account a marital property, even if there is just one name on it. Because tax laws and early distribution penalties can be so severe, they are can be very difficult to divide in divorce. Some couples opt to withdraw a set percentage upon retirement age, while others will roll money over to a comparable individual account. It depends on age, personal preference, potential penalties and immediate financial needs.

A settlement and a QDRO

Dividing a retirement plan should be a two-step process during divorce. The divorce settlement needs to determine asset distribution at a higher level, with an approved QDRO, or qualified domestic relations order, to handle the finer details of the retirement plan itself. A QDRO allows for controlled distribution of a 401(k), pension or other retirement fund. Each account needs a separate order.

Without taking extra care with the retirement fund, one partner can end up with more than the other, or the financial loss from penalties and taxes might offset the benefits of the plan. It’s important that an experienced attorney reviews the documents to make sure that both parties understand that short and long-term benefits from a retirement plan can be very different, depending on when and how the funds are accessed. The division agreed to in a divorce settlement determine this.

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