Dividing assets during divorce can be complex, often especially when a couple’s marital estate features investment accounts and retirement funds. These financial assets often represent significant value and are subject to specific legal and tax considerations as a result. Understanding how these accounts are divided can help both spouses more effectively protect their financial interests as they pursue a fair settlement.
Investment accounts and retirement funds are typically considered marital property if they were acquired or contributed to during a couple’s marriage. This means they are subject to equitable distribution, a legal principle that requires assets to be divided fairly, though not necessarily equally, when a couple divorces. With that said, separate property, such as accounts owned before marriage or inherited funds, may not be subject to division unless they were commingled with marital assets at some point.
Accounts deserving of special consideration
Different types of investment and retirement accounts may be divided in different ways, depending on the preferences of the spouses at issue and/or the discretion of the courts. Common accounts involved in property division processes that may warrant special attention include:
- 401(k) and Pension Plans: These employer-sponsored plans require a court order known as a Qualified Domestic Relations Order (QDRO) to divide funds
- IRAs (Traditional and Roth): While a QDRO is not required for these accounts, the division must comply with IRS rules to avoid taxes and penalties
- Brokerage Accounts: Stocks, bonds and other securities may need to be liquidated or transferred based on the settlement agreement
- Annuities: These can be complex to divide, and division strategies may depend on the terms of any particular contract
- Stock Options and Restricted Stock Units (RSUs): If granted during the marriage, they may be considered marital property even if they have not yet vested
There are several ways spouses can handle the division of these accounts, including:
- Splitting the Accounts: Some accounts, such as IRAs, can be divided by directly transferring funds into a new account for the other spouse.
- Offsetting Assets: One spouse may keep the retirement or investment account while the other receives assets of equal value, such as a marital home.
- Liquidating Accounts: Some spouses choose to cash out accounts and split the proceeds, though this can result in taxes and penalties.
- Future Distribution: In cases involving pensions, a spouse may receive a share of future payments upon retirement.
Dividing investment and retirement assets requires careful planning. Seeking legal guidance as proactively as possible, therefore, is generally wise.
