Who gets the retirement accounts in your divorce?

On Behalf of | Jan 18, 2024 | Property Division |

One of the most complex issues in many high-asset divorces involves dividing retirement accounts.

Under Tennessee divorce law retirement accounts are typically subject to property division, and must be divided in a way that meets state guidelines of fairness.

However, not all segments of retirement accounts qualify as marital property; only the portion amassed during the marriage is subject to division. Any funds accrued before the union or after separation remain the separate property of the owning spouse.

Retirement accounts, generally

There are many types of retirement accounts, including pensions, 401(k)s, IRAs and government or military plans.. Each comes with its unique set of rules and regulations governing division and transfer procedures. For instance, certain types of accounts necessitate a court order called a Qualified Domestic Relations Order (QDRO) to authorize a transfer of some of the funds to the non-owner spouse, while others permit direct rollovers or lump-sum distributions.

Decoding the marital portion of a retirement account

The first step in dividing a retirement account in divorce is to determine what part of the account should be considered marital property. This encompasses calculating the account’s value at the marriage’s inception and its value at the time of the divorce, along with contributions and earnings during the marriage.

The difference between the divorce and marriage values, coupled with contributions made during the marriage, constitutes the marital portion. Any value at the time of marriage, plus contributions preceding or succeeding the marriage, is deemed separate.

Navigating the division of different retirement accounts

The next step involves dividing the marital portion. Generally, there are two main ways to do this: splitting or offsetting.

Splitting entails each spouse receiving a percentage or a fixed amount of the marital portion. Typically, this requires getting a QDRO – a court order that allows the parties to withdraw funds from a retirement account without incurring any taxes or other penalties.

The other main option is offsetting. In this scenario, one spouse retains the entire retirement account while compensating the other with alternative assets of equal value. This approach does not require a QDRO, but it introduces potential tax ramifications and other complexities.

The choice hinges on various factors. These include the type and value of the accounts, the tax implications of each option, and the availability and liquidity of alternative marital and separate assets. The parties must also consider the age, health and earning potential of each spouse, as well as each spouse’s specific retirement goals and needs.

Not just about splitting the funds

The implications of retirement account division extend far beyond the divorce proceedings, impacting current and future income, tax obligations and long-term financial security. Navigating this terrain requires an understanding of rights, options and meticulous planning.