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RETIREMENT
November 1, 2019

What happens to my retirement funds in a divorce?

Answered by
Ben Storey
Director, Retirement Thought Leadership at Bank of America
When you go through a divorce, your retirement accounts are split up like other property. But taxes and legal implications make this much more complicated than simply dividing funds down the middle, and there's a lot to consider.
Assets vs. cash
Assets in a retirement account aren't valued like cash because of the different tax treatments that apply. For example, if you have $100,000 in a traditional IRA and $100,000 in a checking account, the IRA won't be worth as much because the money will be taxed when it is withdrawn.
You have to make sure your attorney fully understands your financial goals and is familiar with the potential tax ramifications and penalties associated with each type of account that may be divided. All of that will influence how they negotiate the division of property.
401(k)s, pensions and other qualified plans
These accounts are split through a qualified domestic relations order (QDRO), which is based on the instructions of a judge. When dividing the assets, the receiving spouse may choose to take the money as a distribution or roll it over into their own plan, such as an IRA. The typical early withdrawal penalty would not apply if the withdrawal was done through a QDRO, but the receiving spouse would still owe taxes. The decision mainly depends on when the spouse intends to use the money, and whether or not they can wait until retirement.
IRAs — Roth and traditional
These accounts are divided under what's called a transfer incident to divorce. Even though money will leave the account, the account owner doesn't owe taxes or penalties, because it's part of a divorce settlement. However, if the receiving spouse decides to take the funds rather than roll them over, they will owe taxes and penalties unless an exception applies.
"Taxes and legal implications make this much more complicated than simply dividing funds down the middle, and there's a lot to consider."
— Ben Storey, Director, Retirement Thought Leadership at Bank of America
Updating your beneficiaries
After you've divided up your various retirement accounts and the divorce is finalized, it's important to revisit, and revise, the beneficiary designations on the accounts you still own. A common mistake is to leave an ex-spouse as the beneficiary.
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Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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