Retirement accounts are complicated, especially in divorce. Here are some questions you may run into.
1. Can a retirement account be divided without triggering taxes?
A tax-free division is possible, but each plan or account has different requirements. Before signing any agreement in divorce, consult with each plan administrator (or account custodian) to properly analyze the process needed for a tax free division. Without the right process, clients may be subject to significant taxes, penalties, and, ultimately, an inequitable division.
While the division of marital property generally is governed by state domestic relations law, any assignments of qualified retirement interests (for example, a 401(k) plan) must also comply with Federal law, namely the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code).
A qualified retirement plan will require a Qualified Domestic Relations Order (QDRO or “Quadro”) to divide the investments in the account. If prepared properly, the QDRO outlines every detail of the split so the plan administrator can complete the transaction accurately.
Attorneys might downplay the need for a QDRO specialist because they often use standardized QDROs made available by plan administrators. However, these templates may not include all of the options for division. A QDRO specialist can help assure the QDRO is prepared accurately and money is divided in a timely fashion.
Non-qualified retirement plans, such as many traditional IRAs or Roth IRAs, may not require a QDRO. Many of these plans require a copy of the divorce decree and custodian specific forms to divide the account.