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How do you split retirement accounts during divorce?

On Behalf of | Oct 4, 2024 | Divorce, Property Division |

Retirement is usually the last thing on anyone’s mind during divorce. However, when negotiations for asset division come up, you will need to think about your retirement plans.

People with high net worth can have up to 55% of their total assets or wealth in retirement accounts. Since these count as marital or joint property, the court can order you and your spouse to split them when you divorce.

Dividing marital property in Maryland

Maryland is an equitable division state. Instead of dividing everything 50/50, the court fairly splits any property or asset categorized as marital or joint based on factors like:

  • How long you were married
  • Your age and health condition
  • How much you earn or may earn from your job
  • Separate or nonmarital assets you own

Once the court gives the order or you negotiate an agreement with your spouse, the actual process may vary depending on the type of retirement accounts you have.

Request a direct transfer of IRA funds

Individual retirement accounts (IRAs) are one of the easier retirement accounts to divide between divorcing couples. You or your spouse only need to request a transfer incident to divorce. This allows you to transfer ownership of the specified amount directly to your spouse and vice-versa.

A transfer incident to divorce does not have tax consequences. However, if you fail to label it as such, you may need to pay taxes and early withdrawal penalties.

Obtain a QDRO for a 401(k)

Qualified plans like your 401(k) plan require you to obtain a Qualified Domestic Relations Order (QDRO). This legal document recognizes that you, your spouse or your children have permission to receive a predetermined amount from the 401(k) or other qualified retirement account.

Obtaining a QDRO is often challenging due to strict and detailed requirements. It is generally best to consult a professional with experience handling divorce-related QDROs.

Retain your rightful share of the benefits

Take note that if you had a 401(k) or IRA before your marriage, the benefits earned during that time do not count as marital property. This can make dividing the assets even more complicated. Seeking legal counsel can help you avoid potential issues when calculating or negotiating asset division and help ensure you have your rightful share of the retirement benefits.

Terenzini & Lucero, LLC.

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