A: With a court order, and only after consulting a tax accountant to make sure you're doing it right!
First, the basic rules:
The division of marital assets in a divorce depends partly on state law. In a community property state, assets are divided equally. In an equitable division state, they're divided equitably. There's an important difference. Equitable' doesn't mean equal; it means fair. It's up to the court to decide what's fair. But when a couple has been married for many years, fifty/fifty is usually deemed to be an equitable split.
What is a marital asset? It's anything that was acquired during your marriage, no matter whose name it's in. This includes the appreciation in your retirement plans. If your IRA was worth $20,000 when you got married, for example, and it's now worth $70,000, the $50,000 increase in value is a marital asset.
When retirement assets are correctly divided in a divorce, there's no income tax or early withdrawal penalty on the money. `Correctly' is the key word.
If John withdraws money from his IRA, and gives it to Jane, he'll be taxed on that withdrawal. Instead, John must give his IRA custodian a copy of the couple's divorce or separate maintenance decree.
This court-approved document instructs the custodian to transfer an agreed-upon portion of John's IRA into a new IRA in Jane's name. The same order directs Jane to set up a new IRA in her own name to receive the money. (Jane's IRA doesn't have to be at the same institution; it can be opened anywhere. If she opens it at a different institution, the money must be transferred directly from John's IRA custodian to Jane's IRA custodian.)
To divide an employer-sponsored retirement plan like a 401(k) or 403(b) plan, you must give the plan administrator a court order called a qualified domestic relations order, or QDRO.
The plan administrator then divides the account in two. Your former spouse can elect to roll his or her share of your 401(k) into an IRA.
If your ex doesn't transfer the money into a retirement account, he or she will owe income taxes on it. But in divorce cases, the Internal Revenue Service waives the 10% early withdrawal penalty that would normally apply to distributions by people who are under age 59 and a half.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.