When your marriage ends, courts treat retirement plans and accounts much like any other asset – a portion is yours to keep, but your spouse gets a cut as well. How much your spouse gets depends on where you live, and when you first began contributing to your IRA. IRAs are among the easiest retirement assets to split in a divorce, but that doesn't mean that certain rules don't apply.
If you began contributing to your IRA before you married, that portion is premarital and it's your separate property. The only portion your spouse has a right to is that which accrued after the date of your marriage. Therefore, the first step in splitting your IRA is to subtract its value as of the date of your wedding from its current value – only the difference is divisible in a divorce. The marital portion includes any growth and passive increases during the marriage, as well as contributions made during that time.
Equitable Distribution Vs. Community Property
Another issue involved in splitting your IRA is how much of the marital portion your spouse should receive. If you live in one of the nine community property states, the calculation is simple: your spouse gets half. Under community property law, both spouses equally own all assets acquired during the marriage. The other 41 states are equitable distribution jurisdictions, which means that courts begin with the premise that assets should be divided 50/50, but judges have the discretion to stray from an even split if doing so would be fair or equitable given the particular circumstances of your marriage. As a practical matter, however, courts usually divide the marital portion of retirement accounts 50/50, even in equitable distribution states. For example, under Virginia law, no spouse can receive more than half the marital portion of a retirement account, and Virginia is an equitable distribution state that allows judges to make a disproportionate split when dividing other assets.
Method of Transfer
Although federal law requires qualified domestic relations orders or QDROs to divide retirement plans in a divorce, most IRAs are exempt from this rule. They're not subject to anti-alienation laws that prevent them from paying out to anyone other than the plan participant. A QDRO is the document that overrides this federal rule, but only SEP IRAs, established by employers as employee benefits, require one. Assuming you don't have a SEP IRA, there are a few relatively simple options for transferring your spouse's portion after you – or a court – determines what that portion should be. If your spouse has an IRA of her own, you can arrange to have her portion rolled over into that account, or she can establish an IRA to accept the rollover. You can also set up a second IRA with your plan provider to take her share, then retitle that account in her name.
The Internal Revenue Service doesn't treat interspousal transfers of IRAs as taxable events, provided they're made according to the terms of a divorce decree or judgment, or a separation agreement entered into and filed with the court with the intention of divorcing. You must also roll the money over into another IRA to escape taxation and penalties as a distribution. After the transfer, your spouse is responsible for any penalties and taxes on her own account if she makes early withdrawals. You have no further liability.
- Divorce Source: Dividing IRAs in Divorce
- CalCPA Education Foundation: Tax Aspects of Retirement Plan Divisions
- Divorce Source: IRAs – Premarital Contributions
- Virginia State Bar: Divorce in Virginia
- Bedrock Divorce Advisors: Do You Live in a Community Property State or san Equitable Distribution State?
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.