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Dividing Retirement Assets in Divorce

Dividing Retirement Assets in Divorce

| November 08, 2021

In a divorce, retirement assets can be divided and transferred to the other spouse without penalty or taxes at the time of transfer, if done properly. There are, however, different rules for IRAs versus 401(k)s or other retirement plans through an employer.

If you are splitting an IRA per a divorce decree, the investment company uses that information to split the account along with their own specific transfer paperwork.  This process takes around 30 days and starts the transfer of the money to an IRA established for the other spouse. IRA to IRA transfers in pursuant to a divorce is not a taxable event. It is important to note that, in general, your attorney is not going to help you with this process. It is up to you, your spouse, your financial advisor (if you have one) and the custodian of the IRA.

I once had a couple who were my clients before they got divorced. Once their divorce was final, I hadn’t heard from them about dividing the accounts I helped them manage. When I called the wife to check in, she said, “John’s attorney was going to do the paperwork.” She was waiting on the attorney and John to get things moved and finalized.

Trust me on this when I say it is not cost effective to have your attorney complete this paperwork since they charge by the hour and are not trained or familiar with account transfer paperwork like financial advisors, who do this daily.

We can also help answer investment related questions, help make future plans for the money, and guide you on how to put those funds to work as you move into the next phase of your financial future as you rebuild and work toward your goals.

If you are splitting a 401(k), this is done with a Qualified Domestic relations order, or QDRO, which is a document signed by both parties and the judge, assigned to your divorce, and submitted to the retirement plan. This can be a lengthy process. Typically, I suggest allowing 90 days for this process, but I have seen cases where the language used in the QDRO has caused major delays.

Those who specialize in creating QDROs (they cannot and should not be drafted by just anyone) will submit a draft to the retirement plan to confirm it follows the plan’s rules and will get it approved once it is signed. Some retirement plans even provide model language for the QDRO preparer to follow.


Once the retirement plan receives the signed QDRO, it establishes the other spouse as an alternate payee.  Once you are an alternate payee you can move that money to an IRA or another retirement plan.  Rolling the money to another retirement plan in your name is a non-taxable event.  You are then the full owner of the money and can use it for your own purposes of retirement income. 


Under a QDRO, if you are under 59 ½ years old, you do have a unique opportunity to take money out of that 401(k) penalty-free.  When I say “penalty-free” I mean no 10% early withdrawal penalty. The funds would still be subject to regular income tax. Normally if you take money out of a retirement account before 59 ½ years old, there is a 10% penalty plus regular income tax, so this gets money out of the plan penalty free.  

Additionally, only the spouse that is the alternate payee in this situation is eligible to receive cash out of the 401(k) penalty-free. Generally, once you are the alternate payee you will receive a letter informing you that you are now established as an alternate payee.  Sometimes they send additional forms to be completed that allow you to transfer the money to your name and/or cash money out to be used for other purposes.  I want to be very clear here: This is the ONE and ONLY time you can take money out and avoid the 10% penalty. Once the money moves, your window is closed. So, what’s the benefit to doing this? Let's walk through a potential scenario.


During the marriage a couple owned a home together. The wife is planning on keeping the home but, for various reasons, there is not enough equity to refinance enough cash out of the home to pay the husband a portion of the equity.  The husband plans to use his portion of the home equity as a down payment for a home of his own.  The wife has a large value in her 401(k) plan. In this example, the wife could split the 401(k) in a way to give the husband enough cash, net of taxes, for the down payment on his home.  Generally, when this is done, the tax liability can be split between the parties, either by adjusting the assets split or they can settle it at tax time. 

While this is only one example, there are many reasons and various scenarios that could be explored if cash is needed and not available from other sources within the marital estate.   

If you would like to further discuss this topic and how splitting a retirement account factors into your divorce, contact me for a consultation.