When it comes time to divide up assets in a divorce, retirement accounts might not be at the top of your mind. However, they may be one of the largest assets you and your spouse own. Pensions, 401(k)s, IRAs, and other retirement plans can represent years of work and future security. And you want to make sure they get separated fairly.
So, how are retirement accounts divided in divorce? This all depends on several factors. Here is a look at the basics so that you can move through the process with fewer surprises and better expectations.
Are Retirement Accounts Considered Marital Property?
In most cases, yes. Tennessee follows an equitable distribution system. That means marital property is divided fairly, not always equally. Retirement accounts are treated the same way as other assets. This means:
- The portion of a retirement account earned during the marriage is considered marital property.
- Any portion earned before the marriage may be considered separate property.
Yes, this distinction is important. If one spouse had a retirement account before the marriage, it is just the growth and contributions made during the marriage that will be divided.
What Are the Typical Types of Retirement Accounts?
Different retirement accounts are divided in different ways. 401(k) and 403(b) plans are employer-sponsored accounts. These are some of the most commonly divided assets in divorce.
Pensions can be more complicated, especially if benefits will not be paid out for years. Courts will use formulas to determine each spouse’s share.
IRAs (traditional and Roth) are also subject to division. However, they do not require the same court orders as employer-sponsored plans.
Remember that each type of account has its own rules, tax considerations, and paperwork requirements.
How Are These Retirement Accounts Divided?
You might think that retirement accounts are split by simply withdrawing money and dividing it in half. That is not true. Courts will use specific legal tools.
Qualified Domestic Relations Orders (QDROs)
For employer-sponsored plans like 401(k)s and pensions, a QDRO is required. This court order instructs the plan administrator to divide the account according to the divorce settlement or court order. With a QDRO, the funds can be transferred without early withdrawal penalties.
Transfers Between IRAs
IRAs do not require a QDRO. However, they must still be divided carefully. Transfers are usually done through a trustee-to-trustee transfer to avoid tax consequences.
What About Retirement Accounts Earned After Separation?
This issue can lead to a lot of confusion. In many cases, contributions made after the date of separation but before the divorce is finalized may still be considered marital property. Keep in mind that the timing and specific facts are important. You want to have documentation with your accounts to make sure that everything is divided fairly.
What About Possible Tax Implications?
Not all retirement dollars are created equal or treated the same. A dollar in a traditional 401(k) is not worth the same as a dollar in a Roth IRA. Why? This is due to the future tax treatment. Courts and settlement negotiations look at this when dividing assets.
Failing to consider taxes can lead to unfair outcomes, even when things appear “equal” on paper.
Can You Negotiate Retirement Division?
Many couples choose to negotiate how retirement accounts are divided instead of allowing the courts handle the issue. With that, you have more flexibility to reach creative solutions, such as trading retirement assets for equity in a home or other property.
Negotiated settlements provide more control and less stress than contested court rulings.
Don’t Forget About Retirement Accounts in a Divorce
Retirement accounts divided in a divorce are some of the most contentious issues when it comes to property division. When you know how these accounts are classified, valued, and divided, that can help you protect your financial future and avoid expensive mistakes.
At Easter & DeVore, Attorneys at Law, we are ready to help you protect your assets and accounts during the divorce process. Schedule your consultation with us today.
