Posted in Firm News
Divorce And Retirement Accounts
Retirement accounts often represent a major part of a couple’s financial future, and when divorce becomes part of the conversation, those accounts typically come under review. Whether it’s a pension, 401(k), IRA, or another type of retirement savings, these funds are subject to division just like other marital assets. Knowing how retirement accounts are handled during divorce helps both parties make informed decisions as they move forward.
Classifying Retirement Funds As Marital Or Separate Property
In Maryland, retirement accounts are treated like any other property acquired during the marriage. If contributions were made to a retirement plan during the marriage, that portion is generally considered marital property—even if only one spouse’s name is on the account. Contributions made before the marriage are often treated as separate property, and those funds may not be subject to division.
When determining how much of the retirement account is subject to division, it’s important to identify when the contributions occurred and how much value the account gained during the marriage. This distinction is especially important for long-term marriages or when one spouse entered the marriage with an existing retirement fund.
How Retirement Accounts Are Divided
The division of retirement accounts in divorce depends on the type of plan and the overall settlement terms. Some accounts can be divided directly through a process called a Qualified Domestic Relations Order (QDRO). A QDRO allows a retirement plan administrator to transfer a portion of the account to the other spouse without early withdrawal penalties or tax consequences. This applies to employer-sponsored plans like 401(k)s and pensions.
IRAs are handled differently. While they don’t require a QDRO, they still must be divided properly to avoid tax issues. The court may order a direct transfer from one spouse’s IRA to the other, and it must be done in line with the divorce agreement to avoid financial penalties.
Offsetting Retirement Accounts With Other Assets
In some cases, instead of dividing the retirement account directly, the parties may agree to offset it with other assets. For example, one spouse may keep the full retirement account while the other receives a larger share of home equity or other investments. This kind of arrangement can work when both parties are close to retirement or want to avoid managing split accounts. However, it’s important to weigh the long-term value of retirement savings against the value of other property.
Tax Considerations During Division
Dividing retirement accounts isn’t just about numbers—it can also involve tax implications. Some accounts are tax-deferred, meaning withdrawals will be taxed in the future, while others may already have taxes paid. Factoring in these differences helps create a fair agreement. If both parties understand the after-tax value of the accounts involved, it becomes easier to reach terms that make sense.
Work With A Trusted Legal Team
Dividing retirement accounts fairly requires careful planning and a full picture of both spouses’ finances. Attorneys like those at Fait & DiLima, LLP have experience guiding clients through this process. We understand how important these accounts are and take the time to help clients protect their financial future.
If you’re preparing for divorce and have questions about how your retirement accounts will be handled, we’re here to help. Contact a Frederick MD divorce lawyer at our firm to discuss your situation and take the next step toward clarity and peace of mind.
