When something takes as long to earn and accumulate as a retirement plan, spouses are understandably protective of this asset if they divorce. At least a portion of retirement plans and benefits are considered marital property in every state, including Iowa. Iowa is an equitable distribution state, however, so exactly how much of your retirement plan your spouse will receive comes down to a variety of factors.
Iowa law recognizes that some assets are a spouse's separate property and the court will not divide these in a divorce. Any portion of your retirement plan earned before you were married is your separate property. The court divides the balance between spouses in a way that seems equitable and fair. Judges base the concept of fairness on a list of statutory factors listed under Section 598.21 of the Iowa Code, including how long you were married, your earning abilities and your contributions to the marriage. Ultimately, your spouse will receive a share of the marital portion of your retirement plan, but it may not be 50 percent. If you negotiate a settlement without going to trial, you can give up another asset equal in value to your spouse's share and keep your retirement plan intact.
Qualified Domestic Relations Orders
If you do decide to divide your retirement plan, or if an Iowa court orders it because you and your spouse have not negotiated a marital settlement agreement, federal law becomes involved. Defined benefit and defined contribution plans require qualified domestic relations orders – familiarly known as QDROs – for division. The Employee Retirement Income Security Act prohibits distribution of benefits under these plans to anyone other than the plan participant, but QDROs override this ERISA provision. A QDRO is a separate court document from your decree and it can be highly complex. Typically, your plan administrator must approve the language included in your QDRO before you can submit it to the court for a judge's signature. The QDRO is then returned to the plan administrator, authorizing disbursement of your spouse's share, either through a rollover into a plan of her own or in periodic payments when you retire.
Federal law – not Iowa law – also governs rollovers. If you divorce before age 59 ½, you can withdrawal from your plan and give a portion to your spouse without suffering the usual 10 percent penalty. For example, you can roll over a portion of your 401(k) into an IRA your spouse has set up to receive the proceeds without penalty and tax-free. If your spouse takes the cash instead of rolling the funds over into another retirement plan, the Internal Revenue Service still won't impose a penalty, but she'll have to pay income tax on the proceeds.
Effect on Property Settlement
Section 598.21 of the Iowa Code also allows judges to consider the award of retirement plans in a divorce when deciding the division of other marital property. When ruling on property settlement, courts can weigh the financial needs and income of each spouse, both in the present and the future. For example, your spouse may not need a full half of the marital portion of your retirement plan if she's permitted to keep the marital home and the mortgage is paid off. Conversely, if she receives a full half of your pension, she might not need the marital home or a share of other investments.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.