Next to the marital home, the retirement accounts you and your spouse own are likely your most valuable assets.
Now that you are facing the property division phase of your divorce, how will the court split those retirement accounts?
Two kinds
There are two kinds of retirement accounts. You and your employer make contributions to the defined contribution plan, or savings plan, such as your 401(k) or IRA. The company retirement plan or pension is a defined benefit plan. This kind of plan will pay benefits to you when you retire, and you will receive those benefits as long as you live. Your years of service and salary history define the benefits of the company retirement plan.
The QDRO
Your divorce decree will explain the division of your retirement assets. For example, the court must issue a Qualified Domestic Relations Order, or QDRO, for a tax-qualified retirement plan covered under the Employee Retirement Income Security Act, or ERISA. QDROs do not apply to military or government pensions nor to IRAs.
The IRA transfer
The divorce decree will generate the nontaxable transfer of the IRA from you to your spouse or vice versa. Section 408 of the Internal Revenue Code governs IRAs.
Considerations for division
Dividing retirement accounts can become complicated, but you can rely on legal guidance for any questions you have and to ensure that the division is equitable. First, the value of a particular plan must be established. The court will then look at the type of asset it is, when it began to accrue and the marital cut-off date. Of course, the value of the retirement account will be of primary importance to you when it is time for actual distribution.