When couples divorce, they must divide the assets they shared and accumulated during their marriage. These assets include any retirement savings that spouses have amassed over the years, whether these savings are in a 401(k) or an individual retirement account (IRA).
There are different strategies to divide different types of retirement accounts. For example, 401(k)s and employment-based retirement accounts require spouses to obtain a qualified domestic relations order (QDRO).
However, dividing an IRA is often a little more complicated. Here is a brief overview of what spouses should know about dividing their IRAs in their divorce.
IRAs and retirement assets are still subject to equitable distribution
Retirement accounts can be some of the most significant assets individuals own in their lifetime. However, regardless of their value, they are still treated like any other asset. IRAs are still subject to Illinois’ equitable distribution laws. So, spouses must calculate the value of their IRA to divide the assets fairly based on:
- The financial needs of both spouses;
- Each spouse’s income;
- The length of the marriage; and
- The standard of living during the marriage.
Even though IRAs are treated like any other asset during the divorce process, there are additional steps that spouses must take to divide their IRAs without facing financial penalties.
What do you need to divide an IRA?
Dividing an IRA between divorcing spouses requires great care. Early withdrawal from an IRA could result in a 10% tax penalty. So, to transfer funds from an IRA without penalty, individuals will need:
- Their divorce decree, or the record of dissolution of marriage;
- The property division agreement; and
- The transfer incident to divorce document.
Transferring the funds allows spouses to avoid financial penalties and give legal ownership of the assets to their ex-spouse. It might be beneficial to consult an experienced divorce attorney before moving forward with dividing an IRA to ensure it is done right.
Remember to update the beneficiaries of the account
Most people include their spouse in their list of beneficiaries who will receive a portion of the retirement assets once the owner of the account passes away. After dividing assets and retirement accounts in property division, spouses must remember to change their beneficiaries if they do not want their spouse to receive more assets from their savings after the divorce.