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How retirement accounts are split in a divorce

On Behalf of | Feb 26, 2021 | Property Division

Arizona is a community property state, which means that joint assets are split equally in a divorce. However, an exception to this rule will likely be made if you signed a prenuptial agreement, postnuptial agreement or any other type of custom marriage contract. Furthermore, assets that are held in a trust may be exempt from property division rules. Take a closer look at how retirement accounts might be allocated after your marriage comes to an end.

When was the account opened?

Generally speaking, contributions to an IRA, 401(k) or other retirement accounts made prior to the marriage are considered to be a separate asset. However, any appreciation that takes place after the union becomes official will likely be a joint asset regardless of when a contribution is made. It is important to note that retirement accounts are typically considered to be joint assets even if your spouse’s name isn’t on them.

How to divide a 401(k)

A 401(k) must be divided per the terms of a qualified domestic relations order, or QDRO, that is issued separate from the final divorce decree. The document provides specific instructions to the plan administrator as to how the account should be divided. It can also be used as proof that a withdrawal is pursuant to a divorce, which means that you may avoid a 10% early withdrawal penalty. However, if funds are not subsequently rolled into an IRA, you will likely be subject to penalties, taxes and other fees.

How to divide an IRA

An IRA will be divided per the terms of a final divorce decree, and there is no need for a QDRO. As with a 401(k), you could face an early withdrawal penalty if you choose to liquidate the account prior to age 59 1/2.

If you are planning on ending your marriage, it may be in your best interest to speak with an attorney. He or she may be able to help you retain assets such as a 401(k), taxable brokerage account or family home.