Are you considering filing for divorce or already a party to a divorce proceeding, where the marital estate includes a substantial amount of retirement savings? For many persons involved in divorce proceedings, particularly later in life, retirement assets are one of the largest components of the marital estate, often exceeding the value of the marital home. Frequently, too, they have been accumulated by only one of the parties. So what happens to those assets in a divorce?
As a general rule, all retirement assets accrued, contributions made or values accumulated during a marriage are part of the marital estate and divided according to law. In Pennsylvania, which applies equitable distribution principles to property settlements in divorce cases, the value of retirement funds must be divided equitably, or fairly (but not necessarily equally), between the parties. When determining what is fair, the court may consider a wide range of factors, including:
- How long the parties were married
- Whether either party was married before
- The age and health of the parties
- The standard of living to which the parties were accustomed
When dividing retirement assets, though, there can be some challenges related to the potential tax consequences. Because retirement contributions are often made in pre-tax dollars, you must be careful, when taking a distribution from an ex-spouse’s 401k or IRA, that you take the right steps to prevent that distribution from becoming taxable income until you want it to be such. Typically, the way that you do that is through a Qualified Domestic Relations Order (QDRO). A QDRO will allow you to rollover the distribution into your own qualified plan without tax penalty.