If you’re in the midst of a divorce in the Maryland and Washington, D.C., area, you’ll probably be required to split the funds in your retirement plan with your ex. Sometimes, the assets are awarded to one spouse or the other. However, whether you’re the one receiving the funds or paying them, it’s important that you understand the rules for dividing your retirement in divorce.
Qualified plan assets and IRAs
Even if you and your ex decide to divide the money in your qualified plans and IRAs the same way, you’ll have to go through a separate process for each division process. A transfer incident to divorce is required to divide an IRA. However, you’ll need a qualified domestic relations order (QDRO) to split 401(k) and 403(b) qualified retirement plans.
You and your ex will have to clarify which category your retirement account falls into before submitting your information to the divorce mediator or judge. This ensures that your assets are correctly listed in your divorce agreement.
Dividing a qualified plan with a QDRO
Divorce is one of the only exceptions pertaining to protection from creditor action or seizure of retirement plans. Divorce and separation decrees allow for an individual to receive funds from the retirement account of their ex-spouse, but the recipient must have a QDRO.
QDROs are similar to transfer incidents for divorce since the transactions are tax-free as long as the transactions are accurately reported to the IRA custodian and state courts. If you are the spouse who is receiving the funds, you can roll your QDRO funds into a Roth IRA, IRA or qualified plan.