What happens to my retirement funds in a divorce?

Assets in a retirement account aren't valued like cash because of the different tax treatments that apply. For example, if you have $100,000 in a traditional IRA and $100,000 in a checking account, the IRA may not be worth as much because the money may be taxed when it is withdrawn.

Make sure your attorney fully understands your financial goals and is familiar with the potential income tax ramifications, including any additional taxes on early withdrawal associated with each type of account that may be divided. All of that will influence how they negotiate the division of property.

These accounts are split through a qualified domestic relations order (QDRO), which is based on the order of a judge and in accordance with the terms of the qualified plan and applicable law. When dividing the assets, the receiving spouse may choose to take the money as a distribution or roll it over into their own retirement plan account, such as an IRA. The typical additional tax for early withdrawal does not apply to distributions made pursuant to a QDRO, but the receiving spouse would still owe federal and, if applicable, state income taxes on the distribution. The decision mainly depends on when the spouse intends to use the money and whether they can wait until retirement.

These accounts are divided under what's called a transfer incident to divorce. Even though money will leave the account, the account owner doesn't owe income taxes because it's part of a divorce settlement. However, if the receiving spouse decides to take a distribution of the funds rather than roll over the assets, the receiving spouse will owe federal and, if applicable, state income taxes and additional taxes on the early withdrawal, unless an exception applies.