Divvying Up Your Retirement Accounts in Divorce

Splitting up with your spouse can devastate your retirement savings if you're not careful. Unless you have the proper paperwork in place, you may be on the hook to pay income taxes on both your share of the account and your spouse's share.

If you’re self-employed, as many doctors are, and have a retirement plan like a SEP or a Keogh in place, splitting up with your spouse can have disastrous tax outcomes if you’re not careful. The same goes if you’re an employee with a 401(k) plan or a profit-sharing arrangement. It’s most likely that you’ll end up splitting the assets in those plans with your ex, and tax advisors suggest that you make sure you’re not on the hook to pay income taxes on his or her share.

The answer is to include a qualified domestic relations order, or QDRO, in your divorce papers. A QDRO spells out your ex-spouse’s legal rights in regard to the assets in your retirement plans. The good news is that the QDRO lets you transfer those assets without being liable for income taxes on them. Without a QDRO, any assets transferred to your ex will be treated as if it came to you, and you’ll get the tax bill. If you’re under age 59½, you’ll also get slapped with a 10% penalty.

You don’t need a QDRO with an IRA, because you can simply rollover money into an IRA set up in your ex-spouse’s name. But make sure that the divorce agreement spells out that you are required to roll over the assets, or you’ll pay the tax and any penalties on the distribution.

A QDRO can be simple or it can be complex and expensive. That’s why many divorce attorneys suggest that you look for other ways to affect an equitable divorce settlement without touching your retirement accounts. If you can get to an agreed-upon split without divvying up your retirement assets, you may be able to avoid the expense of drafting a QDRO.

You can learn more about the requirements of a QDRO at the Department of Labor's website.

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