How to Divide and Withdraw Retirement Before a Divorce Is Finalized

How you divide and withdraw your retirement prior to divorce depends upon what type of account you have.

When your marriage ends, you're not only ending a personal union, you're ending an economic one. Among major tasks that come with separating your assets is the division of retirement accounts. Retirement assets -- other than Social Security -- earned during marriage usually constitute marital property, making them divisible by the court. The way your retirement is divided depends upon the type of account you have; what works for one asset won't necessarily work for another.

Instructions

1. Refrain from dividing an Individual Retirement Account, or IRA, until after divorce. Although your IRA is a marital asset that can be divided tax free, the division must be "incident" to your divorce. "Although transfers incident to divorce are tax free," writes certified public accountant Tracy Stewart in an article on Wealth Management Insider, "a transfer cannot be incident to the divorce until after the divorce has taken place." If you get the timing wrong on your IRA transfer, you could get hit with tax penalties. You can provide for the division of the IRA in your separation agreement which, if you're going to do one, has to be done before divorce, but the actual transfer will not occur until after your divorce decree is entered.

2. Divide your 401(k), 403(b) or other retirement plans by means of a Qualified Domestic Relations Order, or a QDRO. Prior to divorce, enter into a separation or marital settlement agreement covering the division of all retirement assets, which include employer-sponsored benefit and pension plans. Unlike IRAs, these accounts can be split before your divorce is entered. File a complaint for the entry of a QDRO, attaching a copy of the separation agreement, if necessary. Since this will probably be done by consent, you can present a QDRO by consent to a judge shortly after filing the complaint. QDRO preparation is highly technical, so consider retaining an attorney for this part of the process. At a minimum, let a QDRO preparation company draft it for you.

3. Divide any pension plan with a QDRO, as well. The QDRO on a pension is completely different from the one you submit for your 401(k) or 403(b). A pension QDRO contains a mechanism for calculating the monthly benefit to which the nonparticipant spouse is entitled, typically half of the marital portion. If the participant is already drawing benefits, the plan separates the nonparticipant's part and pays it directly. If the participant hasn't started drawing yet, the plan divides the check accordingly once benefits are paid.

Tips & Warnings

• Withdrawing retirement after division pursuant to a divorce depends upon not only the type of asset, but also the individual plan; each plan has different procedures.

• Early withdrawal of retirement assets won't only expose you to tax penalties on the withdrawal; it may also kick you into a higher tax bracket and raise your tax bill on your regular pay.

References

• Woman's Divorce: Dividing Retirement Plans During Divorce
• "The Wall Street Journal"; SmartMoney: Splitting the Retirement Accounts; June 2008
• LegalZoom: Retirement Benefits In A Divorce
• American Institute of CPAs; Wealth Management Insider; Tips on Dividing IRAs in a Divorce; Tracy Stewart, CPA; July 2009

Resources

• U.S. Department of Labor: FAQS About Qualified Domestic Relations Orders
• IRS.gov; Qualified Domestic Relations Order; July 2011