If you’re divorcing in your senior or even middle years, much of your and your spouse’s combined assets are likely tied up in some type of retirement savings plan. You could be counting on 401(k) plans, individual retirement accounts (IRAs) or pension plans. Therefore, it’s crucial to understand more about how these assets will likely be divided once your divorce is finalized.
Since Massachusetts is an equitable division state, if these accounts are considered marital assets, they’ll be divided “equitably,” which may or may not mean equally, between the two of you, unless you mutually agree to other arrangements.
Understanding QDROs and DROs
If one or both of you has a 401(k) retirement plan or pension plan through your employer that needs to be split, you’ll likely need to get a qualified domestic relations order (QDRO) or a domestic relations order (DRO). Note that QDROs are used for plans established under ERISA (Employee Retirement Income Security Act of 1974). These are typically 401(k) plans that private employers offer.
These orders, which are typically signed by a judge as part of a property settlement agreement, allow the party who holds these accounts to distribute a designated amount of funds to the other spouse. They also prevent the spouse whose name is on the account from having to pay early distribution penalties.
With that said, these assets aren’t always divided. Sometimes, each spouse will keep their own, and an equitable property division is arrived at by reallocating other marital assets. This is all part of the property division negotiation and/or litigation process.
What if you have IRAs?
If you and your spouse are already retired or you’ve simply done your own retirement savings over the years by opening IRAs, you typically won’t need any kind of DRO to split them. Your IRA custodian may require one though, so it’s necessary to check on that. If you don’t need a DRO, it’s still crucial that the withdrawal is designated as part of your divorce settlement. This will prevent you from incurring penalties or paying taxes for withdrawing funds from it.
This information merely scratches the surface of what you need to know if you’re dividing retirement accounts in divorce. Fortunately, with experienced legal guidance, in addition to talking with your financial and tax advisors, you can help ensure that the process is resolved as efficiently and effectively as possible.