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Retirement plan rules during divorce

On Behalf of | Aug 23, 2021 | Family Law

If you’re getting a divorce or going through a legal separation, you’ll probably be ordered by the court to share retirement funds with your soon-to-be-ex. Whether you’re the one receiving the funds or administering them, it’s important to understand family law statutes concerning asset division. If you’re a California resident, here are some things you should know about handling your assets correctly and ensuring that you know what you should pay.

Transfer incident to divorce vs. qualified domestic relations order

If you and your ex have decided that you will divide the funds in your IRAs and other qualified retirement plans the same way, there are separate family law regulations that apply to each account. To divide your IRA, you’ll need to undergo a process called transfer incident to divorce. If you have a 401(k) or a 403(b), you’ll have to split the assets using a qualified domestic relations order, or QDRO, in family law court.

Some California courts label both types of asset division as divisible using QDROs. However, you and your ex should clearly define which category your retirement assets fall into when you submit your documents to the family law mediator or judge. This can make the divorce process much less complicated.

Dividing with a QDRO

Divorce is one of the few exceptions to the protections pertaining to a QDRO. Separation and divorce allow for qualified plans to be attached to the ex-spouse if the owner of the plan uses a qualified domestic relations order. This division process is used to fairly divide assets between the plan owner and their dependents, which can include an ex-spouse or children.

Not properly dividing a retirement plan can lead to early withdrawal penalties and taxes. For this reason, it’s important to make sure your funds are divided according to the rules of the type of retirement plan you have.