Dividing retirement accounts in divorce

| Mar 2, 2021 | Divorce |

 

In a divorce, the spouses must divide their separate property from the marital property and then divide the marital property and debts between them in a way that meets the standards of fairness demanded by Michigan law. Property division for fairly simple property like a joint checking account can be relatively straightforward; each party can simply take half, or otherwise divide it according to their divorce settlement.

Many kinds of property are not so easy to divide. For instance, if one spouse wants to keep the family home, they typically must first get professionals to determine the value of the home. Once they have set the value, they can buy out the other spouse’s share in the property.

Retirement accounts are particularly difficult to divide in divorce. Divorcing spouses who are not careful with the division of a retirement account can find themselves facing large tax penalties and other financial burdens.

Retirement accounts in divorce

A retirement account such as a 401(k) or a pension plan gathers value over many years. If  the owner waits until the account is mature, they can withdraw funds from the account tax-free. If they withdraw before the account is mature, they will face heavy tax penalties in addition to any fees for early withdrawal.

Here’s why this matters in a divorce. If a spouse’s retirement account accrues value during the marriage, all or part of the account’s value is considered as part of the marital property, and must be divided between the spouses. Unfortunately, there is no easy way to withdraw and divide the funds in divorce without triggering fees and a big tax bill that can destroy most of the value of the account.

The QDRO

Skilled divorce lawyers can help clients get around this problem. One common method is through the use of a Qualified Domestic Relations Order, or QDRO. This order allows one spouse to withdraw funds from the other’s account and roll them into their own account. This way the divorcing spouses can divide part of the retirement account without incurring excessive fees or taxes.