Legal Separation: Dividing Retirement Assets

Dividing Retirement Assets

Retirement planning is essential for happy and fulfilling superannuation. Many couples invest in IRAs to enjoy a comfortable nest egg during their golden years. As such, it’s no surprise that these accounts can be an essential source of conflict during a divorce. If you’re facing a divorce, you may be wondering about Dividing Retirement Assets. The good news is that, with careful planning, it is possible to divide these assets fairly. Here’s everything you need to ensure the split goes on smoothly.

Types of Retirement Accounts

There are three types of retirement accounts. They include:

Individual Retirement Account

One of the best ways to save for retirement is to open an individual retirement account (IRA). It’s the most common retirement savings vehicle.


For many Americans, a 401(k) is essential to their retirement planning. Many employers offer a 401(k) defined contribution pension plan. Employees can contribute a percentage of their earnings to the project; sometimes, employers will make a matching contribution up to a limit. 401(k)s have many advantages, including the ability to grow your money tax-free and the flexibility to withdraw money when needed.

Pension Plans

A pension plan is a retirement plan that requires an employer to make contributions to a fund. In pensions, retirees receive a set amount of benefits based on a formula that includes the length of employment and salary. Many government employees and members of certain unions qualify for pension plans. There are many different types of pension plans, but they all have one thing in common: they provide a source of income after you retire.

Couple Agreements for Dividing Retirement Assets

It’s no secret that emotions are usually extremely high during a divorce and the divorcees are generally not each other’s best friends. Regardless, there are times when couples choose to hold the reigns of the asset division procedure to keep things amicable – for the children’s sake if nothing else. This is where couple agreements come into play.
Couple agreements are simply legalese for an arrangement both parties agree to outside of court. This is often done with the help of a mediator, who can help facilitate communication and ensure that both parties are on the same page. Once an agreement is reached, it is brought to a judge to sign. After that, it becomes binding – just like any other legal document.

Why Try Agreement as the First Option?

There are several advantages to couple agreements.

  • First and foremost, they tend to be much cheaper than going to court. Putting your differences aside will save on legal fees and omit the costs associated with a protracted divorce battle.
  • In addition, couple agreements tend to be much less stressful than court. You will avoid the drama of a courtroom battle and retain more control over the process and the outcome.
  • Dividing retirement assets through an agreement also establishes some form of fairness as you can make trade-offs with other possessions.

Dispute Resolution

With so much at stake, it’s not surprising that arguments can arise, leading to high tempers, even when you are willing to put your differences aside. However, there is a way to resolve these disputes without resorting to name-calling or expensive litigation: Alternative dispute resolution (ADR).

This term denotes a process through which a neutral third party helps the couple agree on their terms. This is done through mediation, where the mediator helps the couple communicate their needs and find areas of compromise. It can also be done through arbitration, where the arbitrator listens to both sides and makes a binding decision. Although it may not be easy, using ADR for Dividing Retirement Assets can help the couple avoid a lengthy and costly court battle.

Court Procedures

When you’re divorcing, chances are, you are not on the best terms with your soon-to-be ex-spouse. When communication and negotiations fail and you can’t agree, the legal system is there to handle the contested aspects of your divorce. Maryland courts will make retirement asset division the following ways.

Determining What Assets Qualify for Division

Most people have a pretty good idea of what they own outright: a savings account, maybe a 401k from a former employer. But things can get complicated quickly when dividing up assets in a divorce. Maryland is an “equitable distribution” state when deciding who gets what during a divorce – but that doesn’t necessarily mean that everything will be split 50/50. Instead, the court will look at several factors to determine what’s fair. These factors include each spouse’s income, earning potential, age, health, and the skillset needed to maintain the current lifestyle in Dividing Retirement Assets. 

Qualified Domestic Relations Order (QDRO) Maryland

A Qualified Domestic Relations Order must be used to split retirement savings (QDRO). This paper will detail the particular amounts and how the division will function. The court will issue a court order after deciding how to distribute the retirement plan assets. 

The couples’ (and their lawyers’) next step is to create a Qualified Domestic Relations Order (QDRO), which directs the retirement plan administrator to distribute the assets. Most lawyers will contract with a QDRO business to create the final document, which will contain case-specific information and wording that each state requires. By doing this, each party can take advantage of their fair share of the retirement plan benefits.

  • Tip: Methods of Splitting the Assets

Most couples will split the fees to create a QDRO account. This document allows you to divide your retirement assets without cashing out and paying the associated penalties. You can choose an immediate cash-out of your 401(k) portion but may face liability for early withdrawal in Dividing Retirement Assets. 

Others may choose to defer taking a distribution until the account owner retires. In that case, you can choose a lump-sum payment or request regular payments. No matter your route, it’s important to understand your options before making any decisions.

Dividing an Individual Retirement Accounts (IRA)

Dividing an IRA doesn’t have to be a headache. You can request a direct transfer or “a transfer incident to divorce.” The account owner will order the IRA plan administrator to transfer the necessary assets directly to the other spouse’s new IRA account.

You could even “rename” the accounts if you’re feeling wild. The owner-spouse opens a new IRA account and places the other spouse’s name on the old version. Consequently, they leave the appropriate funds in the old one and transfer the remainder into the new version. No muss, no fuss and you don’t even need to go through the QDRO process. This way, you can keep your hard-earned money where it belongs: in your pocket!

Tax Implications

When you divide an IRA via a transfer incident, the recipient takes legal ownership of the assets and assumes sole responsibility for the tax consequences of future transactions or distributions. Your ex-spouse will have to pay taxes on any distributions they take out of the account after receiving the funds. You will not owe tax on the assets sent to them because you followed the IRS rules for transfer incidents.

Essential Tip for Dividing Retirement Assets

However, suppose you’re not careful when dividing up your IRA during a divorce. In that case, you may be responsible for tax and an early withdrawal penalty on your ex-spouse’s entire amount.

To avoid this, list the division percentage breakdown, the dollar amount of IRA assets transferred and all the sending and receiving account numbers for all the IRAs involved in the transfer.

It’s also important to be as specific as possible in your instructions. This means including the name and contact information of both the sending and receiving IRA custodians. With this simple step, you can help ensure that you won’t be hit with an unexpected tax bill come April.

  • Dividing Benefit Plans

A pension is the most common type of defined benefit plan. Since a defined benefit plan guarantees that the participating employee will get a predetermined monthly payment when they retire, it is typically more difficult to evaluate. Furthermore, advantages accrued prior to marriage or after divorce are not regarded as marital property. Nevertheless, anything acquired during the marriage is divisible. As a result, calculating your part of the benefits can be difficult if your spouse has a pension.

Although pensions can be hard to value, they are still an important retirement asset, meaning they will also be divided. This can be done through equitable distribution, which is a fair way of allocating the property. The court considers various factors when determining who gets what, including: 

  • Each spouse’s contributions during the marriage
  • The marital estate’s total value
  • Each party’s finances at the time of divorce
  • Fault grounds

As such, it would help to consult with an experienced attorney to ensure that your retirement account is divided fairly and equitably.

  • Dividing Contribution Plans

A defined contribution plan called a 401(k) allows employers to match employee contributions. The sum of company and employee contributions and any investment gains or losses constitutes the 401(k) value. A 401(k) can be divided through a QDRO in a divorce. 

As an ex-spouse, you can transfer them tax-free to a retirement account if you get income from a 401(k). You are not compelled to move the funds to another retirement account. You can cash out the funds from your 401(k) or retain them in the report, but if you choose the latter, you will be subject to income tax on the distribution and a 10% penalty if you are under the age of 59 1/2.

Key Takeaway for Dividing Retirement Assets

No one wants to think about the end of their marriage, but sadly, it is a reality for many couples. If you find yourself in this situation, you will likely have to split up your retirement assets. The process can be complex and time-consuming, but with preparation, willingness to negotiate with your spouse and an experienced attorney’s help, you can ensure that your assets are properly classified and divided. So, don’t wait until it’s too late – if you’re facing the end of your marriage, start preparing now.