Retirement Assets as Shared Marital Assets
As an equitable distribution state, Tennessee law requires that all shared assets be fairly divided between divorcing spouses. Retirement accounts and other retirement assets are often categorized as marital property and thereby subject to division. This does not always mean they must be split 50/50, but in some cases, retirement assets will be divided equally.
Common retirement accounts that must be split during a divorce:
- 401(k)s
- 403(b)s
- IRAs
- Pension plans
- Employee benefit plans
- Keogh plans
Review our blog to learn more about how a divorce can impact your financial health.
Challenges of Dividing Retirement Plans During a Divorce
The property division process is already complicated, even for couples with straightforward financial situations. Dividing retirement accounts can be one of the most challenging aspects of property division. This is because retirement accounts are often comprised of commingled assets, that is, separate assets and those that are shared may have been used to contribute to retirement plans.
Consequently, in a Tennessee divorce, an individual’s spouse may be entitled to a portion of their retirement account savings.
Many retirement accounts are attached to people’s employment. For example, it is not uncommon for someone to have a 401(k) provided by their employer. If their career began before their marriage, their initial contributions would have been made with their own separate, individual assets. After they are married, their income becomes a marital asset, making further contributions shared.
Another major challenge with dividing retirement assets is that there are strict IRS rules surrounding retirement accounts, and violating those rules (such as withdrawing funds too early) can result in expensive penalties.
Splitting Qualified Plans
Most retirement plans are what are called qualified plans. Qualified plans are typically established by employers on behalf of their employees. This allows the employee to receive certain tax benefits. Examples of qualified plans are 401(k) and 403(b) plans. Annuity-type pensions and other defined-benefit plans are also classified as qualified retirement plans.
When a couple divorces and one spouse is entitled to all or a portion of their spouse’s qualified plan, they must file a Qualified Domestic Relations Order (QDRO). A QDRO is a legal judgment that orders a retirement plan to pay out marital property rights (or child support or alimony) to a former spouse (or current spouse, child, or another dependent). QDROs must provide specific information, including the alternate payee’s name and the amount of the retirement assets to be paid to them.
QDRO transactions are generally tax and penalty-free (unless they are rolled into an IRA, in which case they may be taxed but not penalized).
Splitting IRAs
Splitting an IRA during a divorce is referred to as a transfer incident to divorce. This transfer allows the portion of the IRA to be moved to the awarded spouse without tax consequences or penalties. However, the awarded spouse will have to pay taxes on any future distributions or withdrawals after this initial transfer. The original holder of the IRA will not have to pay any taxes on the retirement assets sent to their former spouse.
When splitting an IRA, it is crucial that the transfer is completed correctly and labeled as a transfer incident to divorce. Failure to do so may result in being assessed taxes and penalties for early withdrawal on the entire amount sent to your former spouse.
Update Your Beneficiaries
Another major issue with retirement funds after a divorce is that many people forget to change the beneficiaries on their retirement plans. People frequently name their spouse as the beneficiary of their retirement accounts, which must be changed after a divorce. Though changing your beneficiary designations may seem like a hassle, you want to make sure that should the unexpected happen, the right people have access to your assets.
In addition to your retirement plans, you should also check the beneficiary designations on your insurance policies, annuities, and other estate planning documents (such as wills and trusts).
Protect Your Retirement with Help from an Attorney
We are frequently asked how to protect retirement accounts from divorce. Though in many situations, there is no way to avoid splitting retirement assets with a former spouse, there are things you can do to safeguard your retirement accounts and protect your financial future. Even if you don’t plan to divorce, planning for the unexpected and having open communication with your future or current spouse can help ensure that both parties receive a truly equitable divorce settlement.
One of the best ways to protect your retirement accounts is to establish a prenuptial agreement in which you designate how existing retirement accounts will be managed during a divorce. This is especially important for spouses who are coming into the marriage with considerable retirement savings. If you are already married, you and your spouse still have options. You may be able to create a marital agreement in which you outline how you would like your retirement accounts to be divided in a divorce.
To learn more about how to protect your retirement during a divorce, reach out to Casey, Simmons & Bryant, PLLC. Our legal team has extensive experience handling divorces and estate planning in Tennessee. We can use our resources and knowledge to help you and your spouse through this difficult process.
