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How do you divide a retirement account in divorce?

On Behalf of | Feb 28, 2023 | divorce |

When a Delaware married couple divorce, they must divide their marital property according to state law. Marital property includes just about everything they acquired during the marriage, and may even include some assets the individuals acquired before the marriage if those assets commingled with marital property.

Dividing marital property can be difficult even for relatively simple types of assets. For instance, the couple may argue over who gets to keep a piece of furniture that has sentimental value. But property division gets more technically challenging with more complex types of property.

One problem that comes up in many Delaware divorces is the question of how to divide a retirement account.

Penalty for early withdrawal

First, note that even when a retirement account is in the name of one spouse only — as in the case of employer-sponsored retirement accounts — it may be considered marital property. That means in order to meet guidelines of fairness under Delaware law, it must be divided.

The big problem here is that one cannot make a withdrawal from a retirement account without incurring big tax penalties, and possibly fees from the financial institution as well. These costs can be high enough that they can wipe out much of the value of the account, leaving both spouses without the funds they were depending on to help them through retirement.

Court orders

The way to get around this problem is through getting a court order. The exact type of order depends on the type of retirement account involved.

401(k)s and similar qualified plans can only be divided through something called a Qualified Domestic Relations Order, or QDRO. This court order instructs the financial institution to divide the account according to the terms of the divorce. The financial institution can then transfer part of the existing account to the other spouse without triggering tax penalties.

IRAs are somewhat easier to divide. The divorce decree itself can instruct the financial institution holding one IRA to divide the account and transfer a designated amount to the other spouse. However, the receiving spouse must put this money directly into their own IRA account.

Property division is tricky, especially in cases involving complex assets. These cases require the knowledge and skill of an experienced attorney.