Divorcing couples who have been married for a while have likely accumulated retirement money and want to be sure they each receive a fair share to prepare for their later years. If you are not familiar with how retirement accounts are split, it helps to understand the role a qualified domestic relations order (QDRO) plays.
The Motley Fool explains the challenges involved with dividing retirement accounts. Retirement accounts and pensions are constructed differently and have varying rules for how they should be split up. Another problem is that these accounts are usually meant to hold the money until a date or threshold is reached when you can draw upon them. But if you divide these accounts up earlier, the law may mandate that you pay fees and taxes.
To successfully split some retirement plans, you will need to have a court issue a QDRO. Not only does a QDRO divide up accounts like pension plans or 401(k)s or 403(b)s, but they typically do so without causing you to pay penalties for dividing the funds before a specific date. Sometimes you can divide up the plan by having your spouse take money directly, or your spouse might roll over his or her share into a separate IRA.
QDROs are not always used in dividing retirement assets. If you share an IRA with your spouse, a QDRO is not needed to divide the assets. A divorce decree or a separation agreement alone can dictate how an IRA is split up. However, dividing an IRA means you would have to pay taxes. A court order is needed to divide the IRA and the funds that are split off should be transferred into a new IRA to avoid taxes.
There are a variety of investments and accounts that can be split up in a divorce, so some consultation with an attorney may be needed to understand the laws involved, including taxes and fees that might be required. Because of the differing needs of divorcing couples, this article should not be interpreted as legal advice for your situation, only as general information. We can help you decide what should be divided and the best way to do so, but please also remember to discuss the tax implications of dividing certain investments with your tax professional.