Division of 401k/IRA/Stock Accounts in Divorce
During your marriage, if your 401k, IRA, or stock account went up in value during the time of the marriage (not before), then it will be an asset subject to division during you divorce.
Most of the times, even without you knowing it, your 401k or IRA account through your employer likely is a valuable asset due to market gains and matching contributions by your employer. Because this is a valuable asset, it is usually a central issue in divorce cases.
Florida is NOT a jurisdiction that automatically splits 401k’s/IRA’s/Stock account’s equally (50/50). Florida is an equitable distribution state meaning the split of these types of accounts will depend on many equitable (fairness) factors that we will prepare your case for, whether you want more then a 50/50 split or less then a 50/50 split. There are many implications of splitting these accounts such as tax issues and estate planning issues.
You will need a knowledgeable law firm like ours to walk you through this process and divide these accounts to your benefit most efficiently. Many larger firms who like to waste their client’s money use “QDRO Specialists”. QDRO’s or Qualified Domestic Relation Orders are discussed in more detail below. These QDRO firms are outside agencies that only draft QDRO’s. They charge a lot of money and may take longer to process the QDRO then a regular law firm. Depending on how you approach the division of these accounts in your settlement will depend on whther you will have to use an outside firm to do the QDRO. Our law firm always handles your case and issues in a manner where we can do the QDRO in house, which saves the client money, and most importantly time. A QDRO has to be drafted to your plan administrators specific requirements, along with the requirements of the law, and the IRS requirements. The process can take up to three months. However this will not delay your divorce case, and QDRO’s are usually executed several weeks after your divorce is granted.
Proper handling is critical in ensuring that the right party is responsible for paying applicable taxes. The type of retirement plan – that is, whether it is an IRA or qualified plan – determines the rules that apply.
Qualified Domestic Relations Order vs. Transfer Incident to Divorce
Even if you and your spouse will divide the assets in your IRAs and qualified plans in exactly the same manner, a separate legal term applies to each type of division. IRAs are divided using a process known as “transfer incident to divorce,” while 403(b) and qualified plans, such as a 401(k), are split under the “Qualified Domestic Relations Order” (QDRO).
Many courts confuse this distinction by labeling both types of divisions as QDROs. Nevertheless, you and your spouse need to delineate clearly the category into which each of your retirement assets falls when you submit your information to the judge or mediator so they are listed correctly in the divorce or separation agreement. Not doing this can produce substantial additional – and unnecessary – headaches.
Dividing an IRA
If you specified that your IRA division is to be treated as a transfer incident to divorce in your agreement, no tax will be assessed on the separation transaction. The movement of funds may be classified as either a transfer or a rollover by the IRA custodian, depending on the circumstances of the division and how the decree is worded.
The recipient will take legal ownership of the assets when the transfer is complete and then assume sole total responsibility for the tax consequences of any future transactions or distributions. This means that if you are going to give half of your IRA to your soon-to-be-ex-wife in the form of a properly labeled transfer incident, she will have to pay the tax on any distributions she takes out of the account after she receives the funds. You will not owe tax on the assets that were sent to her because you followed the IRS rules for transfer incidents.
If, however, you failed to adequately label your division as such, you will owe both tax and an early withdrawal penalty, if applicable, on the entire amount that your ex-spouse received. In order to avoid this, be sure to clearly list both the division percentage breakdown and the dollar amount of IRA assets being transferred, as well as all the sending and receiving account numbers for all of the IRAs involved in the transfer.
The instructions that you provide need to satisfy both the sending and receiving IRA custodians, as well as the judge and state laws. If the division agreement is not approved by the courts, the IRS will require you to file an amended tax return that reports the entire amount you sent to your ex as ordinary income. Furthermore, the balance your ex received cannot be placed in an IRA because it was not an eligible transfer; this means he or she will lose the benefit of tax deferral on that money – and may come back to you to be compensated for that loss.
Dividing a Qualified Plan: QDRO
Divorce constitutes one of the few exceptions to the protections from seizure or attachment by creditors or lawsuits that federal law accords to qualified retirement plans. Divorce and separation decrees allow the attachment of qualified-plan assets by the ex-spouse of the plan owner if the spouse uses a Qualified Domestic Relations Order. This decree is used to divide qualified-retirement–plan assets between the owner and his or her current or ex-spouse or child or other dependent.
QDROs resemble transfers incident to divorce in that they are tax-free transactions as long as they have been reported correctly to the courts and the IRA custodians. The receiving spouse may roll QDRO assets into his or her own qualified plan or into a traditional or Roth IRA (in which case the transfer will be taxed as a conversion but not penalized). Any transfer from a qualified plan pursuant to a divorce settlement that is not deemed a QDRO by the IRS is subject to tax and penalty.