Splitting Retirement Accounts in a Divorce

As a Phoenix divorce mediator, I am asked a lot of questions about splitting retirement accounts when working with couples navigating a divorce or separation. How do we split a 401(K) versus and IRA? Are there penalties or tax consequences in transferring these assets? What is a QDRO (Qualified Domestic Relations Order)? What about premarital contributions? There are many ways to address the division of retirement accounts and certain options have different consequences than others.

During mediation, I always recommend that a couple speaks with a tax or other financial professional in advising them on their various options. However, I am able to provide general guidance that can help a couple narrow down their issues so they can save time and money when meeting with another professional. First, I request that they gather all of their retirement information, including statements, account balances, and plan documents. We identify what types of accounts exist – 401(K), 403(B), IRA, Roth IRA, pensions, etc. Depending on the type of account, there are different requirements for dividing them. Maybe it makes more sense to offset other community assets or debts by transferring more or less than 50% of an IRA to one spouse. Maybe they want to avoid the cost of having several QDROs prepared by only dividing the largest qualified retirement account in a percentage other than 50/50 and leaving the other retirement accounts intact. These discussions are very helpful in starting to identify options that can maximize the whole financial picture after a divorce by locating ways to avoid or minimize taxes, penalties, or other professional fees. In the end, it is all about what is best for the family and the individuals in the long run.

In one case I mediated, the couple had two pension accounts, two 401(K)s, an annuity and a Roth IRA. They were advised by an outside professional that they would need 5 different QDROs if they wanted to split each retirement account in half (although it was questionable whether the annuity required a QDRO). Typically, it can cost $800-$1500 per QDRO. So, they were looking at an additional $4000 to $7500 for QDRO preparation. We met and discussed their various options. They decided to each keep their own pensions (recognizing that the actual value of such pensions is unknown until each person actually retires), split the Roth IRA in half (as it was post-tax dollars and did not require a QDRO) and equalize the three remaining retirement accounts by transferring 45% out of one 401(K) and leaving the remaining two accounts intact. This resulted in them only having to pay for 1 QDRO, yet they still felt that the ultimate distribution was fair and had the best tax consequences. From this example, you can see that there are creative options that can be utilized in mediation that may work out better for everyone’s financial position.

Here is a helpful article on dividing retirement accounts.  Smart Money Article