Wondering how to divide retirement accounts in divorce?
This blog addresses a commonly asked question we hear when clients want to split retirement assets in divorce.
Is there a difference between dividing a Roth IRA and a 401(k) in divorce?
Not all retirement accounts are equal. What do you do when you have the option to divide a Roth IRA versus a 401(k) defined contribution plan? There are pros and cons to dividing each asset that you should consider before deciding which asset you prefer.
Money that is contributed to a Roth IRA is taxed going in. The result is that when it is pulled out at retirement, you will not pay taxes on it. Money that is contributed to a 401(k) is pre-tax, meaning that you will pay taxes on it at the time you withdraw the funds.
The logistics of dividing a Roth IRA are simpler than dividing a 401(k). For an IRA division, you contact the plan administrator directly, fill out the forms, and they transfer the funds into your new account. For a 401(k), you will need a court order called a Qualified Domestic Relations Order (QDRO), in addition to the Final Decree of Divorce. Then the QDRO is sent to the plan administrator for processing before it can be transferred. If the QDRO does not comply with their standards, it may get kicked back to be redrafted and resigned.
Moreover, the 401(k) QDRO must be signed within 30 days from the date the Final Decree is signed. In most cases, this is not a problem and the QDRO can be submitted at the same time as the Final Decree. However, if the date of division is the date of divorce, then you may need to wait to submit the QDRO to the judge. And, if you fail to submit the QDRO timely, then you must file a new lawsuit to enter get the QDRO signed. As such, it is important to stay on top of QDRO drafting and deadlines.
One more thing worth mentioning about early retirement account withdrawals is Rule 72(t), which refers to a section of the IRS Code which specifies exceptions to the early withdrawal penalty for certain types of retirement accounts. Under certain conditions, you may be able to take an early withdrawal from an IRA or 401(k) and avoid paying the 10% penalty for doing so. The exceptions for this rule are very limited and specific, but a financial expert with knowledge on these sorts of transfers can help evaluate your situation and guide you and your attorney on this option.
Generally speaking, when we represent a breadwinner female or professional woman who controls the assets, we may advise that the 401(k) be divided so that her spouse will pay the taxes on his portion later. However, if we represent a stay-at-home mom or homemaker who may not be as financially solvent, we may advise that the IRA be divided so that she does not have to pay taxes on it in the future.
Ultimately, every case is different, and there may be reasons why these options are not always the best way to divide these assets. It’s best to speak with an attorney about your situation before making any decisions about how to divide retirement in divorce.
Alexandra Geczi PLLC offers divorce for women by women. Our female divorce lawyers are some of the top divorce attorneys in Dallas, and we are here to help you let go of a bad marriage and get your shine back. Contact us today to get started.