Dividing retirement accounts can add complexity to your divorce. You may hold these in your name alone. But if you added funds – or if they increased in value – during your marriage, you must split any gains with your spouse. Because Arizona is a community property state, you will each receive a 50% share of these. Making sure you transfer these assets properly, though, is where challenges can arise.
Dividing an IRA
If you have an individual retirement account (IRA), you will split this with your spouse through a transfer incident to divorce. For this transfer to be valid, you must provide details of it in your divorce decree. Once a court approves it, you must give your IRA’s custodian a copy. The custodian will split your account into the shares agreed upon. And your spouse will then receive their portion of your IRA’s assets – tax-free – in an IRA under their name. They will, however, pay taxes on any distributions they take in the future.
Upon divorcing, some people split the assets in their IRA after cashing them out. This arrangement may seem easier, but you will end up shouldering the tax burden instead. You will face similar consequences if you fail to label your transfer correctly in your divorce decree.
Dividing a 401(k) or a pension plan
If you have a 401(k) or a pension plan, you will divide these through a qualified domestic relations order (QDRO). You and your spouse may want to work with your attorneys to draft this order, due to the intricacies involved in creating it. After you two sign your QDRO, you must have it approved by a judge to enforce it. You will then provide your QDRO to your plan’s administrator, who will divide your assets and make distributions to your spouse based on the order. Similar to an IRA, your spouse will be responsible for paying taxes on their distributions.
Dividing your retirement assets can be challenging. By seeking legal advice, you can clarify any points of confusion you may have.