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<xTITLE>Mediating Your Divorce: How to Split Your Retirement Savings</xTITLE>

Mediating Your Divorce: How to Split Your Retirement Savings

by Dakota Murphey
November 2019 Dakota Murphey
Many issues of divorce are frustrating and time-consuming, and if this is something that you are currently going through you may have come across the challenge surrounding your retirement savings. In the majority cases you will be required to share the assets in your retirement plans – although in some cases assets may potentially be awarded entirely or in majority to a single party.

Whether you are facing losing some of retirement funds or you could stand to gain, it is important that you should understand the rules surrounding asset division in your divorce. The fact is that who gets what in divorce proceedings is not necessarily easy to predict. The issue here, of course, is that this is an issue purely of money – but different parties will often have very different opinions on who is owed that money.

Here we take a look at some of the different types of retirement funds you might need to split, and face the question of what is the best way to divide them.

Understanding the legal terms

Firstly, it is important to understand some terms surround issues such as IRAs and qualified plans. Even if you have decided that you are going to divide these assets in exactly the same way, there is a specific legal term that is used for the type of division. When IRAs are divided, it is done with a process known as ‘transfer incident to divorce’, while when qualified plans such as your 401(k) are decided, they used the Qualified Domestic Relations Order (QDRO).

Getting this right can affect the amount of tax that you need to pay on the immediate division of your retirement accounts. Unfortunately, courts are prone to confusing the distinction, and may label both types as QDROs. This is why it can be so essential to work an experience financial expert who has dealt with cases like yours in the past.

Personal attachment to retirement savings

It is worth noting here that in some cases, individuals can become sentimentally attached to their retirement savings. This tends to be the case when they have these savings from their employment history. This may have been something that they paid into throughout their loyalty to specific organization, and as such it can feel much more like their own, than their partners.

“Your eventual income will depend upon the size of the fund at retirement, future interest rates and tax legislation. The type of plan you have will also dictate what you will get. For example, a defined benefit scheme aims to offer a specified level of income at retirement.” (Reeves Financial)

It may have been that the individual feels that this pension always provided a guarantee of money in retirement – and as such their security.

Other complexities

It is also the case that couples are surprised when they learn that pension funds can be transferred between spouses without being taxed – so long as the funds remain as retirement savings. However, things can get a little more complex when you wish to trade specific assets. It might be the case, for example, one partner might get the house, and the other the retirement funds.

The problem here is that these assets might be worth the same amount, but the tax implications are extremely different. Clearly this can be complicated by issues such as when the partner retires.

As well as working with a skilled divorce lawyer, it can be in your interest to take advice from an experienced pension planner in order to achieve good solutions to these sorts of issues.

Dividing a qualified plan

Divorce proceedings allow the attachment of the qualified plan assets by the ex-spouse, if the owner of the plan uses a QDRO. QDROs are similar to ‘transfer incident to divorce’ as they are tax-free transactions as long as it is the case that they have been reported correctly. The spouse receiving are permitted to roll QDRO assets into their own qualified plan or into an IRA.

Dividing an IRA

When dividing an IRA, no tax is assessed on the separation transaction, as long as it was specified that the IRA division was to be treated as a transfer incident to divorce. The movement of the funds can be classified either as a rollover or a transfer depending on the circumstances surrounding the division, as well as the specific wording of the decree.

The recipient takes legal ownership of the assets and is the solely responsible for the tax consequences related to future transactions.


Dakota Murphey draws inspiration from established law firms such as George Ide site. For more information on Child-inclusive mediation, visit their website here.

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