Here’s how retirement accounts are divided in a divorce

On Behalf of | Feb 28, 2022 | High-asset Divorce |

If you’re heading into a high-value divorce, then you’ve probably got a lot of questions about the property division process. In its most basic terms, Ohio law provides for equitable distribution of marital assets. This means that those assets should be divided fairly, although not necessarily equally, depending on a number of factors that a court deems relevant.

With that in mind, whether it looks like your divorce is headed towards settlement negotiations or litigation, you need to be prepared to position yourself for post-divorce financial stability. While some people may find this security by obtaining the family home and accessing bank accounts, you don’t want to overlook the value of retirement assets.

Why people often overlook retirement accounts

A lot of people erroneously think that they can’t access their spouse’s retirement funds during divorce or that doing so will lead to such enormous tax consequences that the fight isn’t worth it. But the reality is that you are entitled to your fair share of retirement assets so long as they are considered part of the marital estate, and the tax implications of dividing those assets is probably going to be pretty minimal, if there are any tax implications at all.

How is the division of retirement assets calculated?

In a lot of cases, the court is going to look at the contributions that were made during the course of the marriage and allocate that percentage to the marital estate. These assets are then subjected to equitable distribution in accordance with applicable factors. This can be a tricky calculation, and the exact dates of your marriage and your separation may be critical. Once the court has identified the amount that needs to be divided, though, then you have to shift your focus to the logistics of that division.

The logistics of dividing retirement accounts

There are several ways to go about divvying up retirement accounts. The exact approach that you take may depend on the type of retirement account that is in play. For example, for 401(k)s, you’ll likely have to secure a Qualified Domestic Relations Order, which allows the retirement plan administrator to divide the account in accordance with that order.

Once the account is divided, the parties may choose to withdraw their share, but that may lead to early withdrawal tax penalties. That’s why many individuals choose to simply wait until the retirement account’s holder actually retires, at which time the other spouse can withdraw a lump sum payment. Probably the majority of individuals, though, simply choose to roll over their portion of the retirement account into their own retirement account.

IRAs, on the other hand, don’t need a Qualified Domestic Relations Order to be split. Instead, a transfer incident to divorce can be requested, which then allows the plan’s administrator to transfer the requested funds to the other individual’s IRA account. Sometimes the account holder opens a new IRA and transfers money from the existing account to the new one, then leaves the remainder of the funds in the old account in the name of the other spouse. This can effectuate fair division, too.

Know how to advocate for what you’re entitled to

A high-net worth divorce can be a huge financial transaction that has implications for your life for a long time to come. That’s why it’s imperative that you know what you can do to position yourself for success. This means knowing the law and how to apply it to your set of circumstances, thereby allowing you to make the persuasive legal arguments that you need in order to be successful at the negotiation table or in the courtroom. We know it’s a stressful and oftentimes frustrating process, but that’s why zealous advocates like those at our firm stand ready to assist you.