In community property states like Washington, marital assets and debts are generally divided down the middle between the divorcing spouses. Matters become more complicated, though, as assets become more complicated. If you and your soon-to-be ex have real estate, vehicles, a retirement plan, stock options, a business or multiple bank accounts, then it’s probably a good idea to get professional assistance in identifying and valuating assets.
With that in mind, let’s consider the division of retirement plans. Unfortunately, sometimes one spouse will try to convince the other that a pension or retirement account can’t be divided. That simply isn’t true. Just because a portion of only one party’s paycheck went into the plan doesn’t mean that a retirement account isn’t community property.
A retirement plan such as a 401(k) or an IRA may be regarded as separate property (not to be divided), but only if the account was fully funded prior to the marriage or if a prenuptial agreement states that the plan can’t be divided. Otherwise, a spouse whose paycheck didn’t fund the plan could still be entitled to a share of it.
A form called a Qualified Domestic Relations Order (QDRO) will be needed to transfer funds to a spouse who didn’t technically contribute to a private-sector retirement plan. Other forms are needed for public-sector retirement accounts. A QDRO can also be used to transfer retirement savings to the child of a plan participant.
If you intend to receive part of a retirement plan as part of a divorce settlement, then you can either roll the funds over into another plan, such as an IRA, or withdraw the money. This last option will likely incur a penalty, so it’s best to consult with your divorce attorney about your short- and long-term goals before making a decision that could affect your financial future.
Source: Forbes, “The Big Money Mistake Divorcing Women Make,” Kerry Hannon, July 3, 2014