Retirement accounts often represent one of the largest marital assets—but dividing them requires navigating complex rules to avoid taxes and penalties. Understanding how 401(k)s, pensions, and IRAs are divided in divorce helps you protect your retirement security.
Retirement Accounts as Marital Property
Retirement benefits earned during marriage are generally marital property subject to division—even if the account is only in one spouse's name. The portion earned before marriage may remain separate property, requiring careful calculation.
Qualified Domestic Relations Orders (QDROs)
Dividing 401(k)s, 403(b)s, and most employer-sponsored plans requires a QDRO—a court order directing the plan administrator to pay a portion of benefits to the non-employee spouse (the "alternate payee").
QDROs must include specific information: participant and alternate payee names and addresses, plan name, amount or percentage to be distributed, and payment timing and method.
QDROs must be approved by both the court and the plan administrator. Work with an attorney familiar with QDROs—errors can be costly and difficult to fix.
Dividing 401(k) Plans
401(k) accounts can be divided several ways:
Direct transfer via QDRO: Funds transfer directly to the alternate payee's retirement account with no immediate tax consequences.
Cash-out via QDRO: The alternate payee can receive cash, paying income tax but avoiding the usual 10% early withdrawal penalty (the divorce exception).
Offset with other assets: One spouse keeps the 401(k) while the other receives equivalent value in other assets.
Pension Plans
Pensions are more complex because benefits may not be fully vested or payable for years. Division options include:
Immediate offset: The pension's present value is calculated, and the non-employee spouse receives equivalent value in other assets now.
Deferred distribution: Via QDRO, the non-employee spouse receives a portion of each pension payment when the employee spouse retires.
Deferred distribution shares both the risk (pension may not pay as expected) and reward (benefits may increase).
IRA Division
IRAs don't require QDROs—but transfers must follow IRS rules. Transfers between spouses incident to divorce are tax-free if done properly. The divorce decree or separation agreement should specify the transfer, which the IRA custodian executes.
A direct trustee-to-trustee transfer avoids triggering taxes. Cash distributions followed by rollover also work but are riskier.
Calculating the Marital Portion
When the account includes both pre-marital and marital contributions, the marital portion must be calculated. Common methods include:
Coverture fraction: For pensions—dividing years of marriage during employment by total years of employment.
Tracing: Identifying specific contributions made before vs. during marriage.
Balance method: Comparing account values at marriage date and divorce date.
Survivor Benefits
Many pensions reduce benefits if the employee spouse dies first—unless a survivor annuity is elected. Consider whether the divorce settlement should require survivor benefits to protect the non-employee spouse's share.
Tax Implications
Retirement account divisions have tax consequences:
Transfers via QDRO: Generally tax-free if done properly.
Cash-outs: Taxed as ordinary income, but QDRO distributions avoid early withdrawal penalties.
Offset approaches: The spouse keeping the account faces eventual taxes; the spouse receiving other assets may receive after-tax value.
Factor taxes into fairness calculations—$100,000 in a 401(k) isn't equivalent to $100,000 in cash after accounting for future taxes.
Military Retirement
Military retirement has special rules under the Uniformed Services Former Spouses' Protection Act. Direct payments from DFAS require at least 10 years of marriage overlapping 10 years of military service. Shorter marriages can still divide benefits but may require the member spouse to make payments.
Social Security
Social Security benefits aren't divided in divorce—but ex-spouses married at least 10 years may claim spousal benefits based on their former spouse's record without affecting the former spouse's benefits.
Getting Legal Help
Retirement division requires specialized knowledge. Errors can result in tax penalties, lost benefits, or unfair division. An attorney experienced in retirement division, possibly working with a financial advisor, helps ensure you protect your retirement security.