Dividing Retirement Accounts in Divorce

Retirement accounts are often significant assets for married couples, and splitting them up when spouses part ways can be a contentious issue. While certain types of property can be easily distributed between spouses, dividing retirement accounts in divorce is more complicated. Not only are there tax implications to consider, but these assets must be valued carefully to determine how much they are worth now, and in the future. Additionally, certain retirement accounts may require a specific type of order to be entered, called a QDRO — these documents are complex and much more nuanced than a typical court order.

Are Retirement Accounts Subject to Division in Divorce?

In addition to the marital home, a retirement account may be a couple’s most valuable asset — especially if the marriage was of long duration. Notably, like any other marital property, retirement accounts can be divided in divorce. This includes the contributions made to the account and any increase in value during the marriage.

Retirement accounts that may be divided in divorce can include the following:

• 401(k) accounts — A 401(k) is an employer-sponsored retirement savings plan. It allows employees to contribute a portion of their wages on a pre-tax basis, potentially with employer matching.
• 403(b) accounts — 403(b) accounts are retirement savings plans for public school employees, non-profits, and certain tax-exempt organizations. Similar to 401(k)s, they offer tax-deferred contributions through payroll deductions with the potential for employer matching.
• Pensions — A pension is a type of retirement benefit offered by employers that provides a regular income to employees upon retirement based on their years of service and salary. Think of it as a promise to pay a certain amount upon retirement, often based on years of service and/or salary during the service.
• Individual Retirement Accounts (IRAs) — An IRA is a personal retirement account that allows individuals to save for retirement while offering tax advantages and investment options.
• Employee stock options — Employee stock options are an employment benefit that offers employees the opportunity to purchase company shares. This gives an investment option to employees different from a traditional retirement plan. Although technically more complex than traditional retirement plans, these assets can also be subject to division in divorce if they were acquired during the marriage.

Courts in Maryland follow the rule of equitable distribution when dividing retirement accounts in divorce — this doesn’t necessarily mean equal, but rather, a judge would divide the assets in a way they deem fair. However, it’s essential to understand that only the portion of the retirement account that was accumulated during the marriage would be considered marital property and subject to division. The portion of the retirement account that existed before the marriage would be considered separate property and belong to the original owner. Often, where the marriage and the length of contribution is long, this can prove to be a difficult issue to prove for certain types of retirement plans.

How are Retirement Accounts Divided in Divorce?

There are two ways retirement accounts can be divided when spouses end their marriage. A couple can resolve the issue of dividing retirement accounts in divorce between themselves outside of the courtroom — or they can allow a judge to decide. Mediation and the collaborative divorce process can be helpful to facilitate communication between spouses and assist them with achieving an amicable settlement without judicial intervention. In the event a couple cannot reach an agreement regarding how retirement funds should be distributed, a court would look at a variety of factors to decide how to divide the assets equitably.

Some of the factors a court would look at to determine each spouse’s share of a retirement account can include the following:

• Each spouse’s monetary and nonmonetary contributions to the family
• The economic circumstances of each spouse at the time of the divorce
• The value of all property interests of each party
• The duration of the marriage
• The circumstances that contributed to the estrangement of the spouses
• Each party’s age
• Each spouse’s physical and mental condition
• How and when the retirement assets were acquired, including each party’s effort in accumulating it
• Any alimony award or award the court made regarding the family home
• Any other factors deemed necessary and appropriate to arrive at a fair and equitable division

Importantly, the issue of dividing retirement accounts in divorce may be simplified if a prenuptial or postnuptial agreement was executed. In such cases, the terms likely would control whether these benefits would be considered marital or separate property — and determine how they should be handled.

When is a QDRO Needed?

When it comes to dividing retirement accounts in divorce, it’s vital to be aware that certain types of accounts require a “Qualified Domestic Relations Order.” Commonly referred to as a “QDRO,” this order applies to 401(k)s, 403(b)s, some pensions, and other “qualified” plans. The order must be signed and issued by the court. Specifically, it informs the administrator of the retirement plan that they are required to pay a portion of the plan benefits to the non-employee former spouse.

It's important to note that QDROs are not needed for certain types of retirement plans. For instance, a QDRO cannot be used to divide an IRA — the division of these types of retirement accounts would be addressed in the divorce decree, or another property settlement agreement, and the funds would be directly transferred from one spouse to the other. Federal pension plans are also exempt from QDROs, which instead require a Court Order Acceptable for Processing (COAP) to divide retirement benefits.

Contact an Experienced Maryland Divorce Attorney

If you are parting ways with your spouse and retirement assets are at issue, it’s crucial to work with an experienced divorce attorney who can protect your legal and financial rights. To learn more about dividing retirement accounts in divorce and how we can help, contact Strickler, Platnick & Hatfield to schedule a consultation.