Don’t Divorce Your Retirement Savings


Divorce is hard. Even if it’s an amicable split, spouses must divide households and property, assets and liabilities. It can get complex. An important piece sometimes forgotten until too late is retirement savings. Financial situations and state laws vary, but retirement savings accounts that were funded and/or grew in value during the marriage are generally considered marital assets. To split these types of accounts between separating spouses, certain requirements under the federal tax code and ERISA must be met to ensure the assets are divided as ordered, don’t become subject to tax and penalty in the current year, and you don’t have to go back to court to get the proper documentation.  

Here is some basic information about splitting retirement savings in a divorce. Be sure to talk to your legal counsel about these assets before the property division is final. The language of the court document and the actions of both spouses are critical to receiving the beneficial tax consequences.

Self-Directed Traditional and Roth IRAs, SEP and SIMPLE IRA Plans

If a portion of an IRA owned by one spouse is awarded to the other spouse in a divorce, the money must be transferred in a certain way to avoid incurring taxes on those assets in the current tax year. A proper transfer will not be treated as a taxable distribution to either individual, and the assets transferred to the receiving spouse’s IRA will be treated as that individual’s own retirement assets.

First, a “divorce or separation instrument” is required. This can be a judgment of dissolution of marriage, a judgment of legal separation or separate maintenance, or a written instrument incident to such a judgment. It must contain a provision that grants all or part of one spouse’s interest in an existing IRA to the other spouse. It should also specify the dollar amount or percentage, specific asset, timing requirements, valuation date, and whether the investment is to be liquidated before transfer. IRA custodians will require a copy of the judgment (or the relevant pages) before transferring the account.

Second, the portion of the IRA awarded to the other spouse must be directly transferred. If the entire IRA is awarded to the other spouse, tax laws permit a transfer of ownership through a name change on the IRA account (although the custodian may still require the receiving spouse to sign a new IRA document). Additional documentation may be required to change ownership on the title of the asset. If just a portion of the IRA is to be transferred, the receiving spouse must establish a new IRA or designate an existing IRA to receive the transfer. The original IRA owner should direct the IRA custodian to transfer the dollar amount (or other figure based on the court order) from their IRA directly to the custodian of the former spouse’s IRA. The IRA owner should also give instruction or consent to liquidate the investment or to transfer the asset in-kind. Each spouse may agree to own a percentage of an asset through their separate IRAs.

If, instead of going through this process, an IRA owner withdraws money from their IRA to satisfy a court-ordered settlement or child support mandate, the withdrawal will be taxable to the IRA owner and subject to a 10% early distribution if they are younger than age 59½.

Profit Sharing, 401(k), 403(b), & Governmental 457(b) Plans and Pension Plans

Workplace retirement plans follow slightly different rules than IRAs because they are subject to the Employee Retirement Income Security Act (ERISA) in addition to the tax code. Some or all of a participant’s retirement benefits may be assigned to a spouse, former spouse, child, or other dependent to satisfy family support or marital property obligations only if the court’s domestic relations order is a “qualified” domestic relations order (referred to as a QDRO). The plan administrator must make this determination. The QDRO information may be included as part of a divorce decree or court-approved property settlement, or issued as a separate order, but the following must be included and submitted to the plan administrator:

  • Name and last known mailing address of the participant and each alternate payee
  • Name of each plan to which the order applies
  • Dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee
  • Number of payments or time period to which the order applies

The plan administrator must acknowledge receipt of the request for a QDRO determination by a written notice provided to the plan participant and the alternate payee. The plan administrator must separately account for and preserve the amount that would be payable to the alternate payee until a determination is made. A second notice must be provided when the order has been determined to be a QDRO or to inform the parties that the order is not a QDRO and what additional steps need to be taken.

When working with legal counsel to provide retirement account information to the court, be sure to gather all the necessary information about the retirement plan. The Department of Labor has stated that many domestic relations orders fail to qualify initially because they don’t take into account the plan’s provisions or the participant’s actual benefit entitlements. Mistakes in drafting this portion of the domestic relations order will require additional time and legal fees to correct.

An QDRO that provides a “separate interest” to the alternate payee will typically result in the alternate payee holding a separate account under the plan with their assigned percentage or dollar amount as of a certain date. The alternate payee will be able to take payment from the plan under the terms of the plan.

For more information, see the DOL’s publication on QDROs.