If you and your spouse have decided to end your marriage, you will soon face the property division aspect of your divorce.
The more assets you have, the more complicated property division will be. Splitting your retirement accounts will add another layer of complexity to the process.
A difference in paperwork
Both you and your spouse may have a 401(k). You will need a Qualified Domestic Relations Order, or QDRO, for the distribution of funds. The QDRO is a legal document that divides the retirement account with your spouse and shows that each of you has a right to a share of the money. The QDRO also takes care of eliminating penalties or taxes if you take an early distribution. Other employer-sponsored plans or pensions will require separate QDROs. Taking money from individual retirement accounts will require a transfer incident, a movement of funds that is also tax-free.
You have several options as to the way you receive distributions out of retirement accounts:
- Request a direct transfer to roll assets into your own retirement account
- Postpone distribution until the account holder retires
- Cash out your share of the balance
Remember to update the beneficiaries on any retirement accounts that you and your soon-to-be-ex-spouse divide.
Different tax consequences apply to different kinds of retirement accounts. Keep in mind that you contribute to a 401(k) on a pre-tax basis, but you contribute to a Roth IRA after paying income tax. You can rely on legal guidance to help you sort through all the tax implications that will arise during the property division phase of your divorce.