Dividing Retirement and Investment Accounts

The Distribution of Retirement and Investment Assets Upon Divorce

One of the more challenging components of a divorce is often the division of debts and assets. Though much personal property can be easily allocated, and real estate is often sold or appraised at fair market value as a part of the settlement, dividing investment and retirement plan assets can be tricky.

Retirement Plan Assets

There are typically two ways that retirement accounts can be divided as part of a divorce:

• Pursuant to a qualified domestic relations order (QDRO)
• As a “transfer incident to divorce”

Whether a QDRO will be required or the transfer will be made incident to the divorce depends on the type of investment plan. An individual retirement account (IRA) is allocated as a transfer incident to divorce, whereas all other qualified retirement plans, such as 401(k)s and 403(b)s, are divided by using a QDRO.

Both QDROs and transfers incident to divorce are tax-free events, provided all IRS rules are followed.

Dividing Investment Accounts

As a general rule, the division of investment accounts during divorce is essentially a matter of negotiation. If certain investments were owned by one of the parties before the marriage, courts are inclined to return at least the fair market value of the investment at the time of the marriage to the party that brought it into the marriage. Any appreciation during the marriage is subject to negotiation.

When negotiating the split of investment or brokerage accounts, some of the principal considerations should be:

• How liquid are the investments?
• Are the investments long-term or short-term value investments? Stocks and bonds tend to be long term investments, whereas CDs and mutual funds are considered short term investments
• Will the investment passively appreciate (like a savings bond) or will it require active involvement?

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