Retirement Accounts & Divorce: What to Expect

There is so much to financially sort through during the divorce process. From splitting physical assets to dividing up real estate to sorting through retirement accounts, different rules and laws apply for different types of marital assets. In this post, we discuss how retirement accounts are typically handled in a divorce, what to expect, and what to consider as you make decisions around this part of your divorce process. 

How retirement accounts are typically handled in a divorce

While retirement accounts can have only one account holder, the funds in these accounts belong to the marital unit as a whole. This is true despite the fact that the account title or funds may have come from one spouse’s payroll deduction (such as 401k contributions). Therefore, overall, any accumulation (including contributions and investment gains) during the marriage is considered a marital asset and is accounted for in the overall division of property. It is important to note that any balance in retirement accounts accumulated before marriage is considered separate property since the funds were earned before the date of marriage.

Sometimes the 50/50 rule of splitting each asset, including retirement accounts, is not practical for the couple. If, for example, one party wants the house or other large assets, sometimes off-setting one asset for another could be an alternative to help settle the case. In this example, if one party wants the house but does not want to buy the other person out based on the current home’s value, the person who is not getting funds from the house could request more retirement funds in the divorce settlement, because of significant tax differences associated with each asset.  

It is imperative to work with an experienced financial professional to help you evaluate a division in this manner as the adjustments to division values can be dramatically different for each individual. Note that some laws and regulations around this are state-specific, so choose a financial team that has experience in your state.

Specifics of how accounts are divided

There are a variety of retirement accounts that are subject to their own rules and regulations in a divorce. Below, you’ll find common account types and the process of how to divide the account.

Roth IRA and Traditional IRAs (SEP-IRAs and Simple IRAs)

The process to divide these assets requires a ‘Transfer Due to Divorce’ form to be signed (usually by both spouses, but not always) from the account institution.  A copy of your divorce agreement outlining said division is usually required.

Roth IRAs hold funds that have already been taxed and Traditional IRA accounts usually (not always) hold funds that have not been taxed. This contrast creates significant differences regarding withdrawal penalties, when assets can be distributed, and overall taxability. The tax discrepancies significantly affects how much net money is received at the time of distribution – in other words, how much money someone can actually walk away with and actually use. Due to the tax liability of these accounts, financial professionals can create account division strategies to address these differences alongside each couple’s needs and concerns.

Similar to Traditional IRA accounts, SEP-IRAs and Simple IRAs are unique employer retirement plans that can have employer contributions. The assets in these accounts have not been taxed and may have withdrawal restrictions depending on how long the account has been open. Even though these accounts are employer retirement plans, they only require the ‘Transfer Due to Divorce’ form from the institution in order for the account to be divided. 

Employer-sponsored retirement plans (401K, Profit Sharing Plans, etc)

The process to divide these assets requires a Qualified Domestic Relations Order. This requires that a professional drafts instructions based upon the agreement, which is reviewed by the company sponsor for approval, and signed by a judge. This process comes as an added expense with one qualified domestic relation order (QDRO) required for each employer retirement account, and typically takes at least 3 months to complete from the time of submission if there are no complications.

It’s important to note that only the vested value is considered an asset and subject to marital division. To add complexity, many 401K accounts can have a Roth 401K component which creates very similar differences as the Roth IRA versus Traditional 401K as discussed above, from a tax liability perspective. It’s important to work closely with a financial professional to understand these details as the 401K statement may not make it obvious that there is a Roth component to the overall account, which impacts the way these accounts should be equitably divided.

Some 401K plans offer participants loans from their 401K accounts. With that in mind, it is important to note whether a loan has been taken against this account previously and determine how to properly account for it during the divorce process.

Employer Defined Benefit Plans (Pensions)

A pension plan is a retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker’s future benefit. The future benefit can be taken in the form of a lump sum upon retirement or a monthly benefit for the rest of the employee’s life (with various survivor options available). A QDRO is required to divide this plan, although some plans require a domestic relations order (DRO) which is a form outlining payment and survivor plans from the institution and therefore professional assistance is highly recommended to ensure it is filled out properly to reflect your wishes. Once submitted, it is very difficult if not impossible to correct mistakes.

Pensions are particularly confusing in the divorce process and pension valuation is usually required to analyze the equitable division of this asset, unless it is already in payment status. Individuals often underestimate the total value of a pension and, depending upon the situation, these can be very large assets. In addition, survivorship planning is critical and varies from plan to plan. The complexity of pensions and the fact that they vary from company to company with various restrictions and distribution requirements makes it essential to work with a financial specialist and QDRO specialist to ensure your divorce agreements reflect these intricacies. Working with the right team also ensures that you avoid post-divorce issues. 


The process to divide these assets requires a ‘Transfer Due to Divorce’ form to be signed, usually both by spouses (but not always), from the account institution.  A copy of your agreement outlining said agreement is usually required.

As a reminder, annuities can be in the form of an IRA or non-retirement, investment account. It’s important to analyze the tax implications properly. When dividing annuities, you may be subject to surrender fees, depending on how long the account has been open, if the account is divided. In other cases, there may be unique provisions, such as doubling or tripling future benefits at various times, or rules around how distributions can be taken and/or the amount of the distribution. Sorting through these details, once again, requires the assistance of a financial specialist with experience in your state.

Mapping Account Transfer Specifics

Most couples will have several different types of retirement accounts unless they have stayed with one employer throughout their career or have a simple financial situation. Based on the differences of these various accounts, it’s important to map where the appropriate destination of assets will be transferred to. For example, although parties can roll over 401Ks, sometimes different types of accounts cannot be combined and therefore one party can end up with a portfolio of different retirement accounts with different tax rules. Working with a financial professional can help you map an efficient and effective transition that can reduce tax liability, transfer expenses, and help you avoid errors that can cost you time and money.

Retirement accounts can lead to confusing financial situations and more questions than answers for most divorcing couples. At A.M. Financial, we specialize in helping sort through these messy financial situations and help you make decisions that support both your short and long-term financial goals. We can work with you to achieve a fair and equitable split based on these different rules, realities, and tax consequences. Contact us for a free consultation.