There are very few “benefits” of divorce, especially financial, but you may find one here, if you or your spouse have tax-deferred accounts or benefits that will need to be divided or allocated between you. When you divorce, you can use a Qualified Domestic Relations Order (“QDRO” (usually said “quadro”)) to balance those funds between you, without liquidating or cashing out the account(s). In some circumstances, a separate account can even be established for each spouse. By dividing them with a QDRO, you maintain the tax-deferred status, and growth and accumulation of the account, rather than liquidating it, and likely losing a substantial part of its value..
What happens to retirement accounts in a divorce? In Michigan, any retirement account, or benefit, which accumulated during the marriage, is marital property subject to division and allocation, by the Court. It does not matter which spouse’s name is on it, or whose employment it accrued as a benefit of. If it built up during the marriage, it is an asset of the marriage. It belongs to both of you.
So, must it be liquidated, tax penalties assessed and income tax liability incurred? Not necessarily. Not every asset in a divorce has to be split and half and parsed out to each spouse. More often, one spouse may receive all, or a larger share of one asset (such as an individual retirement account, or “IRA”), and the other spouse receives more or all of a different asset (such as the house, or a savings account).
If a retirement account does need to be divided, there are ways to accomplish that, in a divorce, without incurring tax penalties and, in some cases, continuing to defer the income tax on the asset. With a qualified domestic relations order (“QDRO”), a “qualified plan” (such as a 401k account) held for the benefit of one spouse, can be divided, and some or all of it transferred into a separate account held for the benefit of the other spouse. For other retirement assets, like an IRA, a transfer which occurs through a judgment of divorce (the final order, dividing your property, assets, debts and liabilities) can usually also be made without penalty, and without changing the tax-deferred status of the asset.
Retirement accounts, assets and plans can be complicated, both to analyze and to divide. If it is not done correctly, the penalties and losses could be substantial. If a transfer is done improperly, and you end up paying 10% early withdrawal penalty, plus income taxes on the “distribution,” you could easily lose a third or more of that asset.
Disagreements over property are common in divorce cases. Although it may not be possible in every situation, divorcing couples can often save a lot of time, money, energy and stress by taking advantage of litigation alternatives, such as collaborative divorce and mediation.
At Rosi & Gardner, we know how to represent you, and protect your portion of marital assets, including retirement assets. Call us at 231.941.5878 to schedule a consultation.