How Your IRA and 401(k) Accounts Are Divided During a Divorce
How to Divide IRA and 401(k) Accounts During a Divorce
Because of how many types of assets need to be divided during a divorce, many couples will overlook the need to split the assets in IRA and 401(k) accounts. Nearly 750,000 divorces took place in 2019 alone, all of which would require assets to be divided. Even though these types of retirement and investment accounts are usually held under the name of one spouse, the assets contained within these accounts are typically considered to be marital assets, which means that they will need to be divided.
How 401(k) and Pension Accounts Must Be Divided
To divide 401(k) and pension accounts, you will first need to seek a qualified domestic relations order, which is entirely different than a divorce decree. This order essentially tells the administrator of the pension plan or 401(k) account that the assets must be split between both spouses. Without this order, the administrator of the account won’t allow assets to be split.
While a spouse should have access to part or all of a 401(k) or pension account, every account has specific rules and guidelines about how this process must be handled. There are times when the plan administrator will only allow these assets to be divided once the account holder reaches retirement age. It’s possible to come to an agreement with your spouse about how to split these accounts, which allows for an amicable agreement to be made that will keep both parties satisfied. Your options for dividing these assets include:
- Split the 401(k)
- Exchange for another asset
- Liquidate the 401(k)
- Switch the 401(k) to an IRA
Likely the simplest way to divide a 401(k) is by splitting the account in half. However, comprehensive knowledge of the specific plan is necessary to make sure that the assets are properly divided. Another straightforward option involves having one spouse keep the 401(k) while exchanging an asset that matches the account’s value. Keep in mind that tax calculations will need to be taken into account to make sure that the asset fully matches the value of the 401(k).
Liquidating the 401(k) is a possibility. However, this option is rarely used because of the downsides to pursuing it. For one, legal approval is oftentimes necessary before the account can be liquidated. Given that other options are available, this approval may not be given. There may also be penalties associated with liquidating the account before you’re supposed to. Extensive taxes must be paid as well. Once the account has been liquidated, it becomes possible to pay your spouse.
The fourth and final option to consider involves rolling the 401(k) account into an IRA, which makes it easier to split the assets without incurring a penalty. By rolling your 401(k) account into an IRA, you will also be able to avoid the tax liabilities that typically exist.
An IRA is advantageous because it allows the recipient to have self-direction over how the account is managed. The main issue with this option is that it’s only available to individuals who are no longer with their employer.
Pension plans are typically considered to be joint accounts, which means that it’s easy to split the assets. The majority of pensions automatically pay benefits to an ex-spouse. Each retirement system has its own guidelines for how to handle the division of assets.
How IRAs Must Be Divided
If you have an IRA, dividing it is considered to be much simpler in comparison to dividing a 401(k) . In the event that the IRA was started at some point during the marriage, the account is automatically believed to be a marital asset.
However, any IRA that existed before the marriage began is treated differently. Only the contributions that were made while the marriage was ongoing will be viewed as marital assets. There are instances when an IRA won’t be viewed as a marital asset. If the account has been inherited, it is usually considered to be separate property that can’t be divided during a divorce.
While there are different types of IRAs that include everything from a Roth IRA to a traditional IRA, the guidelines that govern these accounts are largely the same regardless of the account you hold. The primary difference to take into account is that the assessed value of the account could differ depending on how taxes are handled. With a Roth IRA, it’s possible for contributions to be taxed before or after withdrawals are made, which changes the value of the account. While a divorce decree is needed before IRA assets can be properly divided, a QDRO does not need to be ordered by the court.
When to Divide Annuities
If you or your spouse invested in annuities at some point in the marriage, it’s possible that these assets will need to be divided. However, the tax implications and division calculations can be complicated, which is why you might want to speak with a CPA beforehand. Once the involved parties negotiate percentages, the next phase of this process involves identifying how to divide annuities.
Because there are penalties and tax consequences when handling annuities, you may need to navigate the division of annuities carefully to make sure that their value is maintained. Likely the most common method for dividing annuities involves starting an entirely new contract by removing funds from the current annuity before creating two separate contracts. These transfers are viewed by the IRS as non-taxable transfers, which means that you won’t need to contend with complex tax implications.
Another method for handling annuities is to withdraw through a surrender or sell transaction, which means that one spouse will withdraw some or all of the annuity before distributing the proceeds. While this process is relatively straightforward, benefits may become reduced, taxes could be incurred, and surrender fees may need to be paid. If your annuity is situated within an IRA account, it’s possible to transfer your annuity with a direct rollover, which doesn’t have as many tax implications as the alternatives.
Our New Jersey Divorce Lawyer Can Provide the Help You Need
Unless a divorce is amicable, dividing assets is oftentimes the most contentious element. During a marriage, it’s common for one spouse to get more attached to certain items than another spouse, which could pose a problem when assets need to be divided in half. The same is true with 401(k), IRA, and other retirement accounts. Even if these accounts are only in your name, they are likely viewed as marital assets, which means that the assets would need to be divided in some way.
Our New Jersey divorce lawyer can help you navigate this entire process to make sure that the division of your assets is fair and equitable. If you aren’t on speaking terms with your spouse, we can handle negotiations with them and any legal representation they have. We understand how emotional a divorce can be, which is why our goal is to make this as smooth of a process as possible.
If you still have questions about how to divide your assets or would like to have legal representation by your side while you go through a divorce, call our New Jersey divorce lawyer today at (201) 343-0078 to set up your first consultation.