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Retirement Accounts in Divorce

August 08, 2023

The typical divorce case involves a mix of assets like a home, some bank accounts, some investment accounts, and some retirement accounts and benefits. Of these, retirement accounts and benefits are the least intuitive, the most complex, and have the most strings attached.

According to CNBC, high-net-worth households hold over half their wealth in retirement accounts. Given the prevalence of these types of funds, it is vital to understand them so you can reach a settlement that won’t backfire on you down the road.

This topic is complex, and this post is long.

Not every account type is found in every case. So, please read only about the account types involved in your case.

Framework for Understanding Retirement Accounts

Before we get into the details of each retirement account and benefit type, I want to build a framework for you to understand them.

A retirement account or benefit can be employer-sponsored (tied to your or your spouse’s employer) or individual (tied to an individual only).

Employer-sponsored retirement plans and benefits can also be defined benefit (the plan sponsor promises a specific benefit at a future date), or they can be defined contribution (the plan sponsor promises a specific contribution but does not guarantee a particular future benefit).

Retirement accounts all come with strings attached for withdrawing money. The most common one is that you can’t tap into retirement accounts without a penalty until you attain age 59 ½.

Even after you attain age 59½, you’ll still owe income taxes on the money you take out of a retirement account.

Lastly, different retirement accounts and benefits are divided using other processes. Those processes can be slow (Qualified Domestic Relations Orders) or relatively quick (Letters of Instruction).

401(k) and 403(b)

What is it?

The 401(k) plan and its lesser-known cousin, the 403(b) plan, are common. They are employer-sponsored defined contribution plans where the employer and employee typically make yearly monetary contributions.

Learn all the 401(k) Basics

The plan does not guarantee that the account will have any particular value in the future. The money contributed to the plan is invested at the direction of the plan participant (you or your spouse).

What you need to know

401(k) plans and 403(b) plans are divided using a document called a Qualified Domestic Relations Order (QDRO). This document is separate from your Divorce Decree. It could take weeks to draft and months to be processed by the courts and the plan sponsor (the employer). Dividing a 401(k) (or similar plan) using a QDRO is non-taxable.

Read: What is a QDRO?

 Once the QDRO has been fully processed, the employer sponsoring the plan will open a plan account for the person receiving funds from the plan.

“Dividing a 401(k) using a QDRO is a non-taxable event.”

 The receiving spouse is referred to as the alternate payee. Once the alternate payee account is created and funded, there are three options for an alternate payee to consider:

  • Take a lump-sum distribution: Taking a lump-sum distribution is almost always a bad idea. Doing so will make the entire account balance subject to income taxation in the year of issuance. In addition, if you have not attained age 59½, you will be subject to an additional 10% tax penalty. This destroys wealth and can bump you into a higher marginal tax bracket since the entire distribution is treated like the income you earn from working.
  • Leave the assets in the account: This can be a great option if you don’t need the money right now and don’t have a compelling reason to roll over the assets to a Rollover IRA or your 401(k).
  • Rollover your assets to your own 401(k): If you have your own 401(k) (or similar plan) with your current employer, and if that plan accepts incoming rollovers, you can elect to roll over these assets to that plan. This can be a great way to consolidate assets and simplify your life. A direct rollover has no tax consequences.
  • Rollover your assets to a Rollover IRA: Some people choose to execute a direct rollover to a Rollover IRA to consolidate assets or access professional investment advice. A direct rollover transaction has no tax consequences.

401(k) plan assets can’t be distributed without penalty until you attain age 59½. If you take money out before that time, you will be subject to a 10% penalty in addition to income taxes. Once you reach age 72, if you haven’t started taking money out, the IRS will require you to begin taking Required Minimum Distributions.

There is a workaround for the 10% penalty if your QDRO is drafted properly, and there are limited exceptions to the penalty. That is a key reason to use a divorce financial expert like a Certified Divorce Financial Analyst™ in settlement negotiations.

If you need access to assets and the only thing on the table is a 401(k), a CDFA® may recommend integrating a Rule 72(t) provision into your QDRO or using one of the exceptions permitted by the IRS.

Learn more: What is a CDFA®?


What is it?

A pension is an employer-sponsored defined benefitplan. The typical pension promises a stream of fixed payments (usually monthly) starting when the employee retires and ending with the employee’s death.

What you need to know

Like 401(k) plans, pension plans are divided using a Qualified Domestic Relations Order (QDRO). Also, as with 401(k) plans, once a QDRO is fully processed, the employer sponsoring the plan will open a pension benefit account for the alternate payee. There are two methods for dividing up a pension benefit, and the method used for your case can have a big impact on your immediate and future financial health.

Shared Interest

A shared interest QDRO allows the alternate payee to receive benefits only when the participant begins receiving them. If you are the younger spouse and need the pension income to sustain yourself, you’ll have to wait until your ex-spouse starts taking their benefits.

Shared interest QDROs are best for pensions already in pay status – the participant is already receiving benefits.

Separate Interest

A separate interest QDRO allows the alternate payee to receive their share of the pension benefit at any time that the participant is entitled to receive their pension benefit.

If you are the younger spouse, you can turn on your benefit when your ex-spouse reaches the plan’s early or normal retirement age. You are only waiting for your ex to age, not retire, before you can receive benefits.

Those benefits may be reduced if you choose to take benefits at your spouse’s early retirement age.

Consider that taking benefits early could hurt you down the road – another good reason to have a CDFA® on your team.

Regardless of how your QDRO is written or when you take benefits, those benefits will be subject to income tax in the year received, just like a paycheck.

Individual Retirement Arrangement (IRA) Account

What is it?

An Individual Retirement Arrangement account, better known as an IRA, is exactly what the name sounds like: an individual retirement account independent of an employer. They come in three flavors, each with their own rules.

What you need to know

Regardless of the flavor, IRAs are generally divided using your Divorce Decree and a Letter of Instruction signed by the IRA owner and addressed to the financial institution where the IRA is held (often called the IRA Custodian).

Once your Divorce Decree has been entered with the court and a certified copy is available, the division process can take a few days or weeks.

Upon receipt of a certified copy of your Divorce Decree, Letter of Instruction, and signed account opening forms, the IRA Custodian will open a new IRA account with the new owner’s name on it and transfer the assets awarded into the new account.

Once the new IRA is funded, it is up to the new owner to determine how the funds in the account will be invested.

Now let’s dig into need-to-knows for each flavor of IRA:

Rollover IRA

This IRA was funded using the proceeds of an employer sponsored retirement plan Rollover. Because all the funds in the account are pre-tax dollars, all funds distributed from the account will be subject to income taxation in the year of distribution.

Like other retirement accounts, most distributions taken before you attain age 59½ will be subject to an 10% penalty in addition to income taxes. No matter when they are taken, distributions are subject to income tax in the year of distribution.

Traditional IRA

This IRA was funded with annual contributions from the IRA owner. Because some funds in the account may be post-tax, not every dollar distributed is automatically subject to taxation.

However, unless your ex-spouse kept scrupulous records (that you can access), it may be difficult to prove the amount of post-tax dollars in the account. Like other retirement accounts, most distributions taken before you attain age 59½ will be subject to an additional 10% penalty.

No matter when they are taken, Distributions are subject to income tax in the year of distribution.


This IRA was funded with annual contributions of post-tax dollars from the IRA owner. A Roth IRA is special because normal distributions are not subject to income taxation.

Like other retirement accounts, most distributions taken before you attain age 59½ will be subject to a 10% penalty.

You can access funds from each type of IRA without a 10% penalty if you enter into a Rule 72(t) Agreement or qualify for one of a handful of exceptions. A qualified Certified Divorce Financial Analyst™ can help you figure out your options.

Lean More about IRAs


Annuity contracts aren’t officially a retirement account, but I’ll address them here briefly because they are often treated and used as one.

What is it?

An annuity is a contract between the contract owner and an insurance company. These contracts come in various structures, and addressing each is well beyond the scope of this article.

The key elements of an annuity contract to remember when dividing an estate are the owner (the person or persons listed as owner) and the annuitant (the person on whose life any living or death benefits are based). For example, a couple may own a contract jointly – both are listed as owners – but the annuitant is the husband; all benefits associated with the contract are based on the husband’s life.

What you need to know

Like a 401(k) or pension plan, an annuity is divided using a QDRO. Because division or re-assignment of annuity contracts is relatively uncommon, it’s wise to use a QDRO specialist to draft this type.

When dividing or re-assigning an annuity, keep in mind that, in general, you can change the annuity owner, but you likely can’t change the annuitant.

As with our example above, the jointly owned contract could be changed to an individually owned contract, but any living benefits or future death benefits would still be based on the life of the original annuitant.

In addition, the insurance company that issued the contract may have rules that govern the transferability of that contract. Check with the annuity issuer before agreeing to change ownership on an annuity contract.

Lastly, an annuity contract with an owner and annuitant who are different people is a “complex annuity” with many problems you likely don’t want to deal with. The annuitant should be the same as the owner to avoid issues with benefit payments and taxes.

Once the contract owner chooses to take money from the contract, those distributions are partly subject to income taxation. In addition, distributions before the contract owner attains age 59½ are subject to a 10% tax penalty.

If you’ve made it through this article, congratulations!

By now, your head may be spinning with all the rules, regulations, and strings attached to retirement accounts and benefits.

Having a competent CDFA® who’s skilled in explaining complex rules may be just what you need.

Schedule your free one-hour consultation´╗┐