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Retirement plans in divorce

On Behalf of | Nov 16, 2023 | Family Law

When dividing your marital property in a divorce, some things are easier to split than others. One of the more technically challenging types of property to divide in divorce is a retirement account.

Many Indiana residents have retirement accounts, either privately or through their employers. These can provide crucial funds for getting them through their retirement years, and they can represent a significant part of anyone’s overall net worth. But unlike a regular bank account, most retirement accounts are designed to be accessible only after the owner reaches retirement age. During the owner’s working years, all taxes are deferred. If the owner withdraws from the account before retirement, they will face a substantial tax penalty from the IRS, and likely significant fees from the financial institution.

So, how do you divide your retirement account in your divorce without losing much of its value in taxes and fees? We’ll address that problem below. But first, we should briefly address another question: Why do you have to divide a retirement account in divorce?

Equitable division

Indiana follows the equitable distribution model for property division in divorce. This means that the divorcing couple must divide their marital property in a way that meets state guidelines of fairness.  Anything owned or owed by either spouse, whether acquired prior to the marriage or acquired during the marriage, that is in existence as of the date of filing the Petition for Dissolution of Marriage, is part of the marital estate, subject to being divided equitably.

In practice, the Court can consider what retirement owned prior to marriage as a factor in ordering a different split than the presumptive 50/50.  This means that if you started the retirement account during the marriage, the account is considered marital property even if it is listed only in your name. If you acquired it prior to the marriage, that can be considered in determining an equitable split of the marital estate.


Let’s return now to the question we asked earlier: How do you divide your retirement account in your divorce without facing substantial fees and taxes?

A common way to accomplish this is through asking the family law court for a Qualified Domestic Relations Order, or QDRO. A court can send a QDRO ordering the bank to divide a retirement account according to the terms of the divorce. Instead of treating this as a withdrawal, the institution classifies it as a transfer incident to divorce. In this way, it avoids taxes and fees.

However, you must be careful about how you handle this transfer. This goes for both spouses.

If the account was in your name alone, make sure to go through the right steps with the QDRO and transfer. If you’re the spouse receiving the money in the transfer, you may be responsible for any tax issues once the transfer is complete, so make sure you put it into your own account in such a way that the funds keep their tax-deferred status. It’s wise for both spouses to get professional tax advice in these matters.

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