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How IRAs Are Treated In A Divorce

On Behalf of | Jun 27, 2023 | Divorce

South Carolina follows the equitable division rule. This means that the courts consider each spouse’s circumstances when deciding how to divide marital property. However, some exceptions exist regarding how retirement accounts get divided in a divorce.

Dividing retirement accounts

In divorce cases involving retirement accounts, a common tool used is the Qualified Domestic Relations Order (QDRO). This order facilitates the proper division of retirement accounts, including 403B plans and 401(k)s. With a QDRO, assets from these accounts are allocated among the former spouse, children and other dependents. The advantage of using a QDRO is that it is tax-free, provided that you complete all the necessary documents correctly.

However, when it comes to an individual retirement account (IRA), a QDRO will not be used. In South Carolina, a process called transfer incident to divorce is used. With this type of transfer, the separation transaction does not incur any taxes. And when the funds get moved, they can be defined as a rollover by the IRA custodian or classified as a transfer.

Property division

In South Carolina, marital property includes IRAs and other assets, which get divided during the divorce process. However, only the portion of the retirement plan earned during the marriage is considered. Contributions made before the marriage or after the divorce are considered separate assets.

Since IRAs and other retirement accounts can hold significant sums of money, they can be used as leverage when negotiating for other valuable assets, like the house. For instance, if one spouse has a substantial share of equity in the home, they might choose to relinquish their interest in an IRA in exchange for retaining ownership of the family home.

Divorce is a challenging, emotional process. However, understanding how retirement accounts get divided can make some of the process smoother.