Dividing retirement accounts during divorce

On Behalf of | Aug 28, 2019 | Divorce

Working for many years has enabled you to stash away quite a bit in your retirement account. You and your spouse have sacrificed over the years to have this sizeable nest egg leading into your retirement years.

However, now that the two of you are looking at separating, you wonder what will happen to that money. Do you risk an early withdrawal penalty to divide it, or does the money sit and wait for the time when retirement occurs? When concerned about what will happen to your retirement account, it helps to understand the options to review.

Dividing assets during divorce

When spouses split, they must also split up everything they have. While it is not always in a similar fashion, it should all wind up equally divided. In Washington, the divorce statutes contemplate the equal division of community property between the parties. However, this does not mean every marital account splits evenly, but rather that the parties should come out with an equal amount of the community property pot.

Retirement accounts and divorce

You may have one retirement account or a couple. Regardless, the critical component is coming out with equal shares of the total assets gathered during the marriage. Perhaps you both agree to each take a retirement account, and then the person with the more significant amount pays an equalization payment to the other. This payment may occur immediately, in the form of cash, or it may occur over time. As long as the parties agree that this is how the divide occurs, it can work.

QDRO process

Another popular way to divide retirement accounts is using a Qualified Domestic Relations Order. A QDRO is a separate document and process that physically divides the money in retirement accounts without penalty from one spouse to the other. The court then recognizes the process in the decree. You and your former spouse need to report the process to the IRS properly to make it completely tax-free.

Divorce changes many plans made between spouses. While you and your ex may not enjoy your retirement savings together, it does not mean you will not have your share for when the time comes.