Over fifty percent of marriages in the United States end in divorce every year. However, during a marriage in Ohio, many couples will gain assets that must be divided at the time of divorce. These assets, beyond a home or vehicles, will many times included bank and retirement accounts. Dividing these assets can be difficult due to the different rules that apply to different types of accounts. If one is not careful when dividing retirement assets in a divorce, there can be some unintended consequences like taxes, penalties, or ineffective transfers.
It is important, that if you are dividing retirement assets, to make sure that you are gathering all of the information possible for your financial accounts. At times, you may need to be able to gather information as far back as the date of your marriage. In some cases, there will be portions of retirement and financial accounts that will be considered non-marital assets that will be the separate property of one spouse. So, a careful review of records will be necessary. Many times, retirement accounts can be creatively divided to offset the division of other marital assets.
When it comes to dividing your retirement accounts, however, it depends upon the type of retirement account you have as to how it will be divided. Different sets of rules apply to individual retirement accounts (IRAs) and another set applies to qualified plans.
Many people have 401(k) and 403(b) plans or pensions and these accounts have certain requirements that must be followed under federal law in order to be divided and cannot be transferred directly to your spouse. In order to divide these accounts pursuant to a divorce a separate order is needed under your divorce case matter that is sent to the plan administrators so that your spouse can received his or her share. This is called a Qualified Domestic Relations Order (QDRO), which contains the specific amounts and language necessary to make the division. The QDRO must also follow what the plan allows for division to take place.
However, unlike a qualified plan, an IRA can be divided pursuant to divorce / separation agreement. Generally, IRAs are included in the separation agreements or judgment entries in a divorce. IRA assets can be transferred from one spouse to the other on a tax-free basis only if allowed under a court-approved divorce decree or legal separation agreement.
A copy of the judgment entry or separation agreement from the divorce is provided to the custodian of the IRA and the funds are then transferred directly via a trustee-transfer to the other spouse’s account. Again, generally, this is the only manner in which the shares that are divided between the couple can be transferred without incurring taxes.
Today, same-sex couples who are going through a divorce have the same benefits of nontaxable division of IRAs in a divorce. If distributions is taken from a qualified plan or an IRA without a QDRO or pursuant to a separation agreement under a divorce decree, then a taxable distribution could be deemed to have happened.
If you are going through a divorce and need to divide retirement accounts, it is important to discuss your options with a qualified attorney who can assist you in your divorce. We stand ready to answer any of your questions involving your divorce here at Dahlberg, Stanley & Foderetti, LLC. Please contact our office for a free initial consultation with one of our attorneys to discuss your case.
– Dennis B. Dahlberg, Esq.