Estate Planning Guide

How Retirement Plan Assets are Divided in a Divorce

How Retirement Plan Assets are Divided in a Divorce

If you’ve been ordered to turn over some of your retirement savings to your spouse in a divorce, there are steps you can take to minimize taxes. Learn more.

Stephanie Faris

Published June 11th, 2020

Updated December 8th, 2020

Table of Contents

Key Takeaways

  • During a divorce, the judge may order spouses to split retirement savings as part of the division of assets.
  • To avoid withdrawal penalties, the IRS requires a legal order detailing the specifics of the court ruling.
  • You’ll need to make sure you update your plan beneficiaries after the divorce is final.

Going through a divorce means dividing up your assets, including your house and bank accounts. But one thing you might not have thought about was your retirement savings. Pensions and divorce settlements have a long history, and in recent years, 401(k) plans have increasingly come into play, as well. But when you start splitting up your retirement accounts, you may wonder how taxes come factor in. After all, aren’t you supposed to pay taxes when the 401(k) money is distributed?

When it comes to a pension, IRA, or 401(k), divorce provides an exception to the tax laws. But you won’t get this exception automatically. You’ll need the judge to issue something known as a Qualified Domestic Relations Order (QDRO), which directs a retirement account to issue funds as part of a divorce settlement.

What is a Qualified Domestic Relations Order (QDRO)?

If you’re going through a divorce, you know that separating finances can be complicated. In addition to your assets, you’ll need to disclose any money you have in a retirement fund. In fact, if you crunch the numbers through a pension or 401(k) divorce calculator, you’ll find that the split can be costly.

A Qualified Domestic Relations Order details your divorce pension payout, whether it’s a traditional pension, 401(k), or anything else covered under ERISA. You could be ordered to cash out part of your retirement fund to pay alimony, child support, or as split marital property. With a QDRO in place, the IRS will allow you to roll over part or all of your retirement plan tax-free, as long as it follows the directions outlined on the order.


IRAs are not covered under ERISA, which primarily applies to employer-sponsored plans. You won’t need a QDRO to divide up your IRA.

QDRO requirements

If you’ve used a pension divorce calculator to plan out how much of your retirement savings you’ll lose, you’ve probably also wondered how the QDRO will come into play. When looking at retirement accounts and divorce, it’s important to know how it will work. The receiving spouse will likely have the option to roll the funds into a different account, but to avoid penalties, you’ll need to have a QDRO drafted as part of the divorce proceedings.

Your divorce attorney should handle drafting the QDRO for you. It should include, as per the IRS:

  • the name and last known mailing address for the participant and alternate payee
  • the amount or percentage of the participant’s benefit to be paid to the alternate payee
  • the number of payments or period of time over which payments are to be made to the alternate payee; and the name of the plan.

Partially-funded IRA assets

One thing complicating a division of retirement is when the funds in an IRA account are mixed. If some of your IRA has been funded with nondeductible contributions, you’ll need to know this information in advance.

For situations where IRA assets are a mix of nondeductible and deductible contributions, both you and your spouse will need to know the amount that was nondeductible. You’ll then report this using Form 8606 when you file. If your divorce involves a Traditional 401(k) split, you won’t need to worry about this part.

Updating your beneficiaries

While you’re learning how to protect your 401(k) in a divorce, make sure you also make a note to yourself to update your information with your plan administrator. That includes any name changes or beneficiary designations. Your ex-spouse may still be the primary beneficiary.

If you someday plan to remarry, pay close attention to spouse pension rights regarding your retirement savings. You can keep your kids as your primary beneficiaries in case you die, but you may want to take it a step further. Engaging an estate planning attorney and setting up a trust can give you greater control over where that money goes if something happens to you.

Readjusting your retirement plans

Say your spouse has been granted half of your retirement after divorce. In that case, your own retirement savings will have shrunk by half. Moving forward, the funds remaining in the account will continue to earn interest, compounded by the new money that goes in. But in the meantime, you may need to rethink your retirement plans.

If your divorce pension payout has greatly impacted your retirement plans, it may be time to double up on your savings efforts. There are things you can do to save for retirement, including reducing your cost of living to put extra money into savings. You can also consider pushing back your retirement date in order to get the retirement lifestyle you originally envisioned.

Bottom line

As you’re researching how to keep your pension in a divorce, it’s important to consider how you’ll fund your retirement moving forward. We recommend working with a Certified Financial Planner® to help you get back on track.

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Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

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