HOW DOES A DIVORCE AFFECT ONE’S RETIREMENT ACCOUNTS?
Whether one is working the daily nine-to-five grind or climbing the corporate ladder, many people in Colorado are anticipating the day they can finally retire. To fund their retirements, they may have a 401(k), a pension, and/or individual retirement accounts (IRAs). If a worker is married, it is likely that they and their spouse are assuming they will retire together and thus share their retirement savings. However, what happens to these retirement accounts if a couple divorces?
Retirement accounts, like other assets, are subject to the property division process. However, if a spouse is dividing a 401(k), pension or another employer-sponsored plan, then they need to secure a qualified domestic relations order (QDRO). This is an order of the court that permits one spouse to receive part of their ex’s benefits from one of these types of accounts. For example, one might be awarded a certain percentage or dollar amount of their ex’s workplace retirement account. If one is under age 59.5, they may be eligible for a one-time exemption from being penalized for an early withdrawal. However, unless they roll the retirement funds into an IRA, they will still have to pay taxes on the funds they receive from the employer-sponsored plan.
QDROs aren’t necessary when dividing IRAs. However, a spouse should not simply cash out an IRA and give their ex what they are due, otherwise there will be tax consequences. Instead, the IRA custodian can transfer the specified amount from one spouse’s IRA to their ex. Then their ex can then take those funds and roll them into their own IRA. This way, the funds that are rolled over will not be immediately taxed and neither party will be penalized for an early withdrawal.
Dividing retirement accounts in a divorce can be a complex issue, and this post only scratches the surface of the matter. Thus, readers anticipating dividing retirement accounts through a divorce may want to seek legal advice, so they can better understand their unique situation and how best to proceed in furtherance of their best interests.