Splitting Retirement Accounts in Divorce

Employer Sponsored Plans

Certain retirement accounts such as pensions, 401k, 403b & 457 plans can be split in a divorce settlement via a legal document called a Qualified Domestic Relations Order, or QDRO, for short. Both the judge & plan sponsor must sign off & approve theses documents.

While plan sponsors work with QDROs on a regular basis, the document is far from “old hat.” Specific rules & language need to be followed exactly to ensure that the retirement accounts accurately are split between divorced spouses. Failure to properly complete this document can mean years of waiting and additional legal costs.

We have years of experience dealing with complex divisions of retirement accounts which often include marital & separate property. Working with us can ease this process and help you get your money in a more timely manner.

Unique benefits for alternate-payees

Many of our clients tend to be the spouse of a high-income earner. Until the divorce is settled, it’s common to see individuals rack up attorney fees & other expenses as they do not have access to a large pool of funds. A little known IRS rule can make all the difference for a non-working spouse.

As the alternate-payee, pursuant to IRS Rule 72t, you may have penalty-free access to the retirement account prior to normal retirement age. Specific rules must be followed or any premature distributions could be subject to the normal 10% penalty. Additionally, as most retirement plans are pre-tax, any distributions will create tax liabilities. A proper tax planning strategy must be implemented to ensure divorcing couples understand both the short & long-term ramifications of any retirement distributions.

It is also critically important to note what type of retirement plans benefit from early-distribution rules. While employer sponsored plans such as 401ks benefit from these rules, individual retirement accounts such as Traditional IRAs do not follow the same rules. Schedule a consult with us to ensure you avoid making any serious tax mistakes.

How does the Utah Court System view QDROs?

Divorcing couples can learn about how the Utah Supreme Court case of Woodward v. Woodward, is used to determine the marital portion of a retirement account. From the Utah Courts website:

Spouses may agree between themselves how much of a retirement account each spouse should receive. If the spouses cannot agree to how much each spouse is entitled to, the judge will apply the formula from the Utah Supreme Court case of Woodward v. Woodward, 656 P.2d 431 (Utah 1982): multiply one-half of the value of the account by the number of years the parties were married and divide by the number of years the employee has worked. For example, if the account value is $30,000 and the parties were married for 7 years and the husband worked for 12 years, the wife' s share would be $8,750:

$30,000 x 1/2 = $15,000

$15,000 x 7 = $105,000

$105,000 / 12 = $8,750

Other factors affect this formula, including the date of separation, or whether one of the spouses has done something unreasonable, such as spending, destroying, or giving away marital property.

If a retirement account is to be split or transferred to the other spouse, then a special order, separate from the divorce decree, called a Qualified Domestic Relations Order, or QDRO (pronounced kwădrō) must be signed by the judge. The person who administers the retirement or pension plan cannot divide an account or pay benefits to a spouse who did not contribute to the plan without a QDRO. Once a QDRO is signed by the judge and approved by the plan administrator, the plan administrator will divide the account or pay the benefits according to the QDRO, rather than the pension plan.