How are various retirement savings accounts divided in a divorce?
Contrary to what couples might feel about their individual retirement accounts (IRAs) and other qualified retirement plans, the notion of “what's mine is mine and what's theirs is theirs” doesn't apply. Retirement nest egg accounts, if acquired during the marriage, are considered to be marital property in Michigan and as such, are subject to equitable distribution between the parties upon divorce.
There are several types of retirement plan assets which may collectively represent a divorcing couple's largest liquid assets. Property division of retirement assets may be emotional for some couples as they dismantle a retirement dream that may have started in the often happier early days of the marriage. But aside from the emotional impact, the division of retirement assets is fraught with potential taxation and other consequences. It therefore requires the counsel of a divorce attorney that's knowledgeable in such complex taxation matters.
Generally, retirement plans are either IRAs or qualified plans (such as 401(k)'s, Defined Benefit plans, or pension plans). Transferring assets from either kind of plan at the time of a divorce can have serious tax consequences and penalties to one or both spouses if not done in compliance with numerous, sometimes tedious, requirements. It's important for spouses to know what category each retirement asset falls under and to remember to change the beneficiaries on these plans and accounts.
A division of an IRA must be designated as a “transfer incident to divorce” to avoid both spouses being penalized for an early withdrawal and must be completed within a year of the divorce. In addition, the transfer instructions are complex and require the approval of both the sending and receiving IRA custodians, as well as the judge and the state court to avoid unintentional taxation or penalties.
A division of a qualified plan requires a qualified domestic relations order, referred to as a QDRO. QDROs are similar to IRA transfers incident to divorce in that they will be tax-free and penalty-free transactions as long as they are reported correctly to the courts and account custodians. The assets can be placed in either the receiving spouse's IRA or his or her own qualified plan, whichever s/he prefers.
At the law office of Byers & Goulding, PLC, we possess extensive knowledge of Michigan property division law as well as the skills and tools to handle complex, high-asset divorce cases. Exclusively devoted to family law matters, we serve families throughout Oakland, Macomb, Genesee, Livingston, Lapeer and Wayne counties. Call us today at 248.340.0900 for a free consultation.