A retirement plan often makes up a significant portion of an individual’s financial wealth. That’s why retirement plans can present more difficulty for one or both parties during a divorce proceeding. Most states, including California, regard assets from retirement plans as marital property.
Unless property division has been clearly outlined in a prenuptial agreement, you are entitled to part of your spouse’s retirement plan benefits, and they are entitled to yours. It’s important to work with a qualified attorney during your divorce proceedings so you can protect your interests and avoid paying more than you owe.
Qualified Domestic Relations Orders
The IRS regards a Qualified Domestic Relations Order or QDRO as a judgment or order for a spouse’s retirement plan to pay for property acquired during the marriage, alimony, or child support. The ex-spouse who receives the payments after the court-ordered property division has to report the payments and can roll the payments into an IRA if desired.
Post-Marriage Payments and Contribution Plans
If you receive payments from your former spouse and the money comes from a contribution plan like a 401K, you can usually roll the payments over into your own retirement account without any tax penalties. However, you don’t have to transfer the money into a retirement account. If you access a retirement account before you are 59 1/2 years of age, you’ll have to pay a 10% penalty tax, but this fee is waived if you put the money in a QDRO. Remember that you’ll stay have to pay taxes on this source of income if you decide to spend the money. Working with a professional family law attorney could help you decide how you and your ex-spouse should divide your finances and assets in a way that is as fair as possible for both parties.