Dividing retirement accounts during a Maryland divorce

Spouses divorcing later in life should understand their rights to marital retirement assets and the issues that may arise when these assets are divided.

As divorce after the age of 50 has grown more common, the fair division of retirement assets has become a top concern for many separating couples. Older spouses in Rockville often have valuable retirement assets and limited time to offset financial losses, which can make overcoming a disadvantageous settlement difficult. Consequently, it is essential for these spouses to understand their rights and avoid common missteps when dividing retirement assets during divorce.

Are retirement assets considered marital property?

In Maryland, property that people owned before marriage is considered separate nonmarital property, and inheritances or gifts from someone other than your spouse are classified in the same manner. Otherwise, all property that a couple acquires during marriage is categorized as marital property. This property is subject to equitable distribution at the time of divorce.

Under these guidelines, all retirement account contributions that a spouse makes while married qualify as marital property. Any contributions that a spouse made before the marriage remain his or her separate/nonmarital property. However, it is the spouse's responsibility to prove that the property predated the marriage and the value of the retirement asset just prior to the marriage.

How are retirement assets divided?

The division of marital property can typically be addressed through a separation agreement,[1] but retirement assets can only be divided by use of a special order, e.g. a Qualified Domestic Relations Order (QDRO). According to the Internal Revenue Service, this specialized order enables the pension administrator to divide the retirement assets with the employee's ex-spouse. A QDRO can also order that funds in a retirement account be used to pay alimony and/or child support.

Once a QDRO is finalized, the non-employee spouse may be treated just like an official retirement plan payee. The non-employee spouse will receive payments at retirement age and be required to report those payments to the IRS in the same manner as the plan participant would. The non-employee spouse may choose to roll over some or all of these retirement assets into their own IRA account without incurring any tax liability.

What else should spouses know?

During divorce proceedings, spouses may have the opportunity to pursue different retirement assets or other marital property. The Huffington Post advises spouses to keep the following considerations in mind:

  • Different retirement assets may carry different final values. For instance, if an account was funded with pre-tax contributions, the IRS will tax any withdrawals. In contrast, spouses will not need to pay taxes when they make withdrawals from retirement accounts that were funded post-tax.
  • Non-employee spouses may have the opportunity to make one-time withdrawals before they roll over an ex-spouse's retirement assets. It's important for spouses to carefully assess their financial needs so that they can avoid withdrawing too much or too little.
  • Spouses may be tempted to pursue property that has immediate utility and value, such as the marital home, over retirement assets. However, before doing so, spouses should closely consider hidden costs and the potential difficulties of funding retirement without dedicated retirement assets.

Spouses should make sure that the QDRO is completed and submitted to the pension plan for preapproval long before the divorce is complete. This ensures that the QDRO is not rejected and that both spouses know what to expect financially before the divorce is finalized.

To avoid missteps during this important part of the asset division process, spouses should consider working with a family law attorney who specializes in this area. An attorney may be able to ensure that all retirement assets are accounted for and assist spouses in pursuing an adequate share of all assets, including retirement assets.

 


[1] If the parties cannot agree, the Court has the right to divide retirement assets acquired during the marriage