Throughout your marriage, you and your spouse were smart with your money. You paid bills on time, built up your credit, budgeted and saved for your future retirement. Now that you’re going through a divorce, however, you’re not sure what will happen to all that retirement money you put away over the years.
You’re worried because you think your spouse might get it all and you’ll be left out to dry. You haven’t personally saved anything because you thought your marriage was going to last, and you stayed home during much of that time and manage the household.
While divorce is understandably stressful, learning about the divorce process and how your retirement account will play into it could give you some peace of mind.
What Happens to Retirement Accounts in a Divorce
Retirement accounts that were accumulated during the marriage are generally considered marital assets, which means they are part of the division of assets in a divorce. South Carolina is an equitable distribution state, which means assets are divided fairly and equitably and not necessarily 50/50.
The court decides how assets will be divided based upon a variety of factors like who worked and who took care of the children full-time, each spouse’s age and health condition, how much non-marital property one spouse has and the length of your marriage.
Since retirement accounts may have thousands of dollars in them by the time a couple decides to divorce, this is considered a major asset, and both spouses will typically want a share of the funds. Under normal circumstances, the government penalizes you if you take your funds out of a retirement account early, but there are specific procedures you can follow during a divorce to avoid these penalties.
For qualified plans like 401(k)s, 403(b)s and pension plans, you can use a qualified domestic relation order, or QDRO.
How a QDRO Works
The QDRO, a court order, will assign your former spouse, the “alternate payee,” the right to receive part of, or all of, your benefits under your retirement plan. You are called the “participant,” and you will not get taxed for assigning or distributing the funds.
The alternate payee has to figure out what they want to do with the retirement funds. They can leave the funds in your 401(k), rollover the funds to a personal IRA without touching them or receive a check and transfer the funds to their IRA. The problem with the transfer is the payee will be subject to a 20% withholding tax. They also only have 60 days to put the money back into a qualified or non-qualified account, and they have to add in that 20%. If they do not, they will have to pay income tax on the entire distribution amount and a 10% penalty if they are under 59 ½ years old.
The alternate payee can also cash out the funds, but they will be subject to a 20% withholding tax and income tax, and they will get a 10% penalty if they are under 59 ½ years old.
Another option is to take a lump sum before a rollover, giving the alternate payee some cash to live on for a bit. While there is no 10% penalty, they are going to be taxed on the amount they took out, and the federal government will withhold 20% before making the distribution.
What About Non-Qualified Plans?
Non-qualified plans, like Traditional and ROTH IRAs, you can change the name that’s on the IRA or make a direct transfer of the assets within it. The terms of the transfer must be declared in a divorce or separate maintenance decree, or a document that relates to such a decree in order for the transfer to be tax-free.
Finding a Divorce Lawyer to Help
Dividing up retirement assets can be confusing. What if you need cash flow now, but you don’t want to pay high taxes? What if you want to protect your 401(k) as much as possible? What laws apply if you’re over 59 ½ at the time of the divorce?
A divorce lawyer can answer all these questions for you and help you navigate this confusing process. They will work with you to determine what’s best for your situation, empowering you to prepare for your future post-divorce and giving you advice on how to avoid costly taxes and penalties.
Contact Nowell Law Firm
If you are going through a divorce and need help dividing your retirement plan, the Nowell Law Firm is here to help. We will walk you through all your options so you can figure out the best solution for you and your family. To get started, message us online or call our office today at (864) 469-2481.