How Is a 403(b) Plan Divided During a Divorce?

403(b) retirement plan funds may be included in a couple's divorce settlement.

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403(b) retirement plans are limited to employees of schools, churches and other tax-exempt organizations. If you divorce while participating in one of these plans, you and your former spouse must to decide how to split up these assets. You may need the assistance of a family law attorney if you are unable to negotiate an agreement that both parties will accept. After you finish all divorce-related transfers of 403(b) assets, make sure to update your beneficiary designations on the account to remove your former spouse. If you forget to do this, it might be difficult to locate the correct next of kin to whom you wish to distribute the remaining funds after your death.

Marital Assets

403(b) plan accounts and other retirement plan funds are considered a shared marital asset. You are not required to cash out your account if you can give your former spouse other assets that are equivalent in value. For example, if you and your spouse have decided to split your assets evenly and you have $50,000 in your 403(b) plan and $100,000 in savings, you may choose to give up $75,000 of the savings account instead of taking a distribution from your 403(b) account.

Qualified Domestic Relations Order (QDRO)

Under normal circumstances, assets in a 403(b) plan may not be assigned, attached or levied. You must execute a qualified domestic relations order, or QDRO, to circumvent this restriction. Through your QDRO, you may consent to giving all or a portion of your retirement plan funds to a spouse, ex-spouse, child or other dependent.

Early Withdrawal Penalty

Withdrawals from 403(b) plans are subject to a 10 percent penalty if the recipient is younger than 59 1/2 years old. The penalty is paid on the recipient's tax return at the end of the year and is not withheld from the distribution. Distributions made because of a valid QDRO are exempt from the early withdrawal penalty.

Tax Consequences

You and your ex-spouse must pay tax on any distributions you receive from a 403(b) plan. Mandatory federal tax withholding of 20 percent will be taken out of any direct payments. You may also elect to have state tax withheld. No taxes are withheld if the distribution is rolled over into an individual retirement arrangement or another employer-sponsored retirement plan. If this election is not made immediately, you may still roll the money over to avoid taxes by depositing it into an IRA or qualifying plan within 60 days after the distribution date. If you choose this option, you must make up any tax withholding out of your own pocket and deposit the gross amount of the distribution to the new plan.