Dividing a 401(k) and Other Retirement Accounts in Divorce

The rules for splitting retirement accounts in divorce are complicated. But it helps to know the basics.

By , Legal Editor
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Depending on how much you and your spouse been able to put away for retirement, your 401(k) or other retirement accounts could be among your most valuable assets. What happens to these assets if you get divorced? How do you split a 401(k)? The answer to those questions will depend on the type of retirement accounts or pension plans you have, your state's laws on property division in divorce, IRS rules for transferring or withdrawing retirement funds, and your particular circumstances.

Different Types of Retirement Accounts

The type of retirement account(s) you have will affect the rules for dividing them in divorce. There are three general categories of retirement accounts:

  • 401(k)s and similar plans: Many employers offer plans that allow their employees to contribute a percentage of their wages to investment accounts for retirement savings, with the income taxes deferred until they withdraw the money. Some employers will also match the employee contributions, up to a limit.
  • Defined-benefit pension plans. A few employers (or unions) still sponsor retirement plans that provide retirees with a set amount each month. Unlike a 401(k) or other "defined-contribution plan," the amount won't depend on the current value of the employee's investment choices (meaning it won't fluctuate with the stock market).
  • IRAs: Eligible taxpayers may contribute to different kinds of individual retirement accounts that aren't sponsored by an employer, including traditional IRAs, Roth IRAs, and SEP IRAs for self-employed taxpayers. The IRS rules for these accounts are different than for employer-based plans, and each type of IRA has its own rules on contributions and tax consequences.

Property Division in Divorce: The Basics

When you're getting divorced, you and your spouse are always free to agree between yourselves on how you'll split up your property, including your retirement accounts (more on these agreements below). There are many advantages to reaching a divorce settlement agreement. It will save you time and money on lawyers' fees for court battles, and you'll have more control over the outcome of your case.

But whether you agree on how to split your retirement assets or a judge has to make that decision for you, you should understand your state's rules on property division in divorce and how they might apply to retirement accounts. That way, you'll be better prepared for settlement negotiations—or trial, if it should come to that.

Most states use what's known as the "equitable division" rule to divide a couple's marital property when they get divorced. That means that judges will decide what's fair under the circumstances. In a few states, judges will start out by presuming that a couple's property should be divided equally between the spouses, but they may order an unequal division if that's appropriate. Only a few states, like California, require a 50-50 split of the couple's community property in divorce.

Spouses usually get to keep their separate property after a divorce. But in a significant minority of states that use the equitable division rule, judges may include all of a couple's assets in the property division during divorce, whether those assets could be considered marital or separate property.

How to Split Retirement Accounts in Divorce

Even though the basic rules for dividing property during divorce apply to retirement accounts—just like other assets a couple owns—there are several wrinkles that are specific to 401(k)s, IRAs, and pensions. Some of these have to do with calculating the value of the couple's interest in the accounts, while others stem from federal rules on how to transfer or withdraw funds as part of the property division.

How Much of a Retirement Account is Marital Property?

In most states, courts will divide only a couple's marital property, while the spouses will keep their separate property. The specifics vary from state to state, but general rule is that marital property includes any assets you or your spouse acquired during the marriage, other than gifts or inheritances. In some states, "during the marriage" means before your final separation date. In other states, it means before you started the divorce process or got your final divorce decree.

So the first step in splitting a retirement account will typically be to calculate how much of its value is marital property. In some situations, this might be a fairly simple process. For instance, if you started contributing to a 401(k) or opened an IRA after you were married, the marital property would equal the entire balance in the account when your marriage ended (which might be the date of separation or divorce, depending on where you live). If you started contributing before you were married, the marital portion is generally the difference between the value of the account at the beginning and end of your marriage.

When it comes to defined-benefit pensions, however, it's incredibly complicated to figure out the current value of the plan and how much of it is marital property. You'll need the help of a pension valuation expert.

When You Can Keep Your 401(k) After Divorce: Agreements and Court Orders

If you're like most divorcing couples, you and your spouse will work out a property agreement at some point in the process—often with the help of mediation, your lawyers, or both. Typically, you'll start the process by listing all of your assets (and debts) and assigning a value to the marital portion of each of them. In fact, most states require spouses to exchange detailed financial information after they've filed for divorce.

But once you have all the numbers, you don't have to split up each individual asset. Instead, you'll probably make trade-offs during the settlement negotiations. For example:

  • If you and your spouse each have 401(k)s that are worth roughly the same amount, you might simply agree that you'll each keep your own account.
  • If only one of you has a 401(k) or pension (or one account is worth more than the other), you might agree that one spouse will keep it while the other spouse will get one or more different assets (like a car or even the family home) to even things out.

You'll need to submit your agreement to the court, but the judge will usually approve it as long as it appears to be fair. Typically, the settlement agreement will then be made a part of the final divorce decree or judgment.

In cases without a settlement, judges go through a similar process when they're deciding how to divide property in divorce. They'll often assign each spouse a percentage of the total value of the couple's property (minus outstanding debts) and then distribute their various assets and debts accordingly.

IRS Rules for Dividing Retirement Accounts in Divorce

Of course, not all couples own enough other assets to balance out the property division if one spouse gets to keep the 401(k) or pension. In that case, the account holder may have to transfer some of the funds to the other spouse.

The IRS has specific rules for dividing retirement accounts in divorce. Those rules vary, depending on the type of account. If you don't follow the rules, you could face tax penalties for early withdrawals, or the account managers might not honor your settlement agreement or court order.

What's a QDRO—and When Do You Need One?

When you and your spouse have agreed to split an employment-related retirement plan like a 401(k)—or the judge has ordered you to do so—you'll need to prepare a special kind of order known as a Qualified Domestic Relations Order (QDRO) that tells the plan administrator to divide the funds.

The requirements for QDROs in federal law are detailed, lengthy, and complicated. (26 U.S.C. § 414(p) (2022).) If your QDRO doesn't include all of the right language and information, it won't be valid—and the plan administrator won't accept it. You can read about QDROs in this brochure put out by the U.S. Department of Labor. But even if you're working with a lawyer in your divorce, you'll almost certainly need to have a specialized QDRO expert prepare the order. (Most experienced family law attorneys will either hire an expert directly or refer you to one.)

In most cases, couples will split the fees to create a QDRO. If you're concerned about the cost, you can ask the judge to include payment requirements in your final divorce order. Once both spouses have approved and signed the QDRO, they'll return the document to the court for the judge's approval signature before sending it to the plan administrator.

Note that there are special, separate rules for dividing military pensions in divorce.

Dividing IRAs

When you're dividing one or more IRA accounts in divorce, you don't need to go through the QDRO process. Instead, the account owner may simply request a direct transfer of funds to the other spouse's new IRA account. Usually, you'll submit a special form to the bank or investment firm that holds the account, along with a copy of the divorce judgment or decree stating that the transfer is "incident to divorce." That language is important, because it means that the account holder won't be taxed on the distribution. (26 U.S.C. § 408(d)(6) (2022).)

Tax Consequences of Dividing Retirement Assets

The tax consequences of transferring or withdrawing funds from retirement accounts depend on the type of plan, your age, and whether you've followed the IRS rules.

Most people who are receiving money from their spouse's retirement accounts as part of their divorce will choose to have the funds transferred (or rolled over) to their own retirement account. That way, they don't have to pay taxes on the money now, and they're building for their own retirement.

But what if you need to cash out your share of the retirement account now? You'll have to pay income taxes on the amount you receive. The plan administrator will take out 20% withholding for those taxes, but you should be prepared for the possibility that the distribution could bump you into a higher tax bracket. If you're younger than 50-1/2, you might also have to pay the 10% early withdrawal penalty, depending on the type of retirement plan:

  • IRAs: Direct distributions from an IRA (rather than a rollover or transfer to another retirement account) are subject to the early withdrawal penalty.
  • 401(k)s: It won't count as an early withdrawal if you get a direct distribution with a valid QDRO from your spouse's 401(k) or other qualified retirement plan. (26 USC § 72(t)(2)(C) (2022).)

The tax consequences, as well as the pros and cons of different options, will be different for some types of retirement plans, like Roth IRAs and defined-benefit pensions. To learn which options are best for your situation—and to avoid any surprises on the tax front—you should speak with a financial advisor or an attorney who's knowledgeable about the tax consequences of distributing retirement funds in divorce.

Can You Cash Out a Retirement Account During Divorce?

Once you or your spouse has filed divorce papers, it's common for the court to issue temporary restraining orders (TROs) that are aimed at maintaining the status quo in your finances until your divorce is final. These orders typically prohibit either spouse from transferring, selling, or otherwise disposing of assets without getting the other spouse's written consent or authorization from the court. In some states, these orders are automatically included in all divorces. Otherwise, either spouse may ask the judge to issue a TRO.

If there's an order like this in your case, you or your spouse typically may not unilaterally cash out a retirement account during the divorce—at risk of sanctions for being in contempt of court. However, the orders may make an exception for withdrawals needed to pay reasonable attorney's fees for your divorce proceeding.

But even if cashing out a retirement account during divorce wouldn't violate a court order, anyone who does this could be required to pay the other spouse for their fair share of the account—as well as compensate them for losing out on the tax advantages of a legitimate transfer incident to divorce or distribution under a QDRO.

What If Your Spouse Hides a 401(k) During Divorce?

Just as it's not a good idea to cash out retirement plans during divorce, attempting to hide those assets from your spouse could get you into serious legal trouble. It's a standard requirement in divorces that both spouses exchange detailed financial information with each other and submit financial declarations to the court. By signing these forms, they're typically affirming under penalty of perjury that the information is complete and accurate to the best of their knowledge. You might also be required to testify in a deposition about your assets—again, under oath.

So if your spouse later finds out that you intentionally didn't include a retirement plan as an asset in your financial statements, you could be charged with perjury. Also, the judge would probably grant your spouse's request to reopen your divorce case in order to deal with the newly discovered retirement plan.

Getting Help With Retirement Accounts and Divorce

If you've read this far, you're probably getting the picture that the rules for dividing and transferring retirement plans are complicated. You'll most likely need legal and financial advice to do it right. A family law attorney can explain your options, help protect your interests, and refer you to any other tax or QDRO experts that might be necessary.

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