How are retirement accounts divided in a divorce?
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How are retirement accounts divided in a divorce?

On Behalf of | Apr 29, 2021 | Family Law

If you are getting a divorce, you might need to divide one or more retirement accounts. This can be a complex process. Since Virginia is an equitable distribution state, these accounts might not be divided 50/50.

The value of the plan

First, you need to consider how the account will be valuated. Most retirement plans are either a defined benefit plan or a defined contribution plan. Examples of a defined contribution plan are a 401(k) or an IRA. An individual contributes a certain amount, and an employer may also contribute. Contributions are pre-tax, so when comparing the value of the account to other assets, it is important to remember that taxes will be paid later on withdrawal. A divorce is generally an event that does not incur extra taxes or penalties as long as certain guidelines are followed. With a defined benefit plan, assessing the value can be more complicated because distribution may not happen until retirement. It may also be necessary to address the issue of survivor benefits.

Division and QDROs

The process of dividing accounts varies based on the type of account. For example, for a 401(k), pensions and some other types of plans, it is necessary to have a document called a qualified domestic relations order, or QDRO. This document must be sent to the plan administrator. A QDRO is not necessary when dividing an IRA.

The complexity of dividing some retirement plans could mean that a couple decides to take another approach, such as having one person keep the retirement plan and the other person keep the house. If both parties are aiming to each keep roughly equal assets, it is important to accurately assess their value. For example, people should make sure to consider the cost of maintaining the home or how taxes will affect the value of the retirement account.

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