Dividing retirement assets is an important part of divorce, especially for those couples splitting after 50 (a so-called “gray divorce”). After years of saving, an employer-sponsored retirement plan is often one of the largest assets in the couple’s name. But many divorcing couples are unaware of the ways in which retirement accounts can be divided, or even if they can be divided without significant tax consequences. Below are the answers to commonly asked questions regarding retirement plans and Massachusetts divorce.
Is my spouse entitled to a portion of my retirement savings?
Retirement savings are subject to equitable distribution in Massachusetts. Through equitable distribution, a judge will determine a division of assets that is fair between the divorcing parties. A division of a retirement plan could involve one party transferring all or a portion of the account to the other, splitting one account into two, or having one party forego all or a portion of retirement plan benefits in lieu of assets with more immediate liquidity.
How do I divide a retirement plan?
A divorce decree, by itself, cannot divide an employer-sponsored retirement plan. Under federal law, a Qualified Domestic Relations Order (QDRO) is needed to divide a retirement plans governed under ERISA, such as a 401(k), employee stock ownership plans, and pension plans, in order to preserve its tax benefits. IRAs do not need a QDRO to transfer assets between spouses (or soon-to-be ex-spouses). Funds from an IRA can be rolled over into another IRA set up by the other spouse tax-free.
What are the requirements of a QDRO?
A QDRO must describe exactly how retirement assets will be divided and must be tailored to the employer’s account. Both the presiding judge and the employer must sign off on the QDRO. The QDRO must list every retirement account subject to the QDRO.
What will my ex-spouse receive and when?
An equitable division means a fair distribution of assets, not necessarily an equal division of assets. For divorcing couples with a large retirement plan, the division will be a significant component of divorce negotiations. How retirement plan accounts should be approached in divorce is highly dependent on individual circumstances and the goals of the parties to the divorce.
Importantly, an early withdrawal of funds in a divorce will be treated with the same tax consequences as an early withdrawal for any other purpose. A QDRO is therefore best used to keep retirement assets for the future, not for immediate cash payments.
A QDRO can pay a set dollar amount or a portion of the retirement account. The QDRO will also list the number of payments or transfers to the alternate payee or the time in which distributions will be made.
Who should I contact about dividing retirement assets in divorce?
At Martino Law Group, our attorneys have experience in the nuances inherent to high-asset divorces, including dividing retirement accounts and the tax consequences of splitting retirement benefits. Contact our office to discuss your situation and legal options.