Dividing retirement accounts in divorce

Making the step from separation to divorce is a big decision with a considerable number of financial and emotional considerations to overcome. One factor that is particularly prominent in divorces where the couple has been married for a long time is the fair and equitable division of retirement accounts. 

Community property division 

New Mexico is a community property state, so marital property is typically divided equally during a divorce. The term “marital property” describes property, assets, debts, business interests and wealth that have been acquired during the marriage rather than assets that predated the marriage, even if they were acquired while cohabiting prior to marriage. 

It is important to keep in mind that equal division does not necessarily mean that the value of each separate asset must be shared equally. Instead, it means that the overall value of the marital estate is divided equally or as close to equally as possible in the circumstances.

Pensions and retirement accounts are usually divided based on contributions and the amount by which they have increased in value during the duration of the marriage. Pensions that were amassed prior to marriage are typically excluded from community property [1]. This means that if a couple was married for 10 years but one or both parties paid into a retirement account for 20 years, the first 10 years of contributions would be excluded from consideration during divorce proceedings. The value of the remaining 10 years of contributions would be included in the marital estate to be split evenly between the divorcing couple.

Types of retirement accounts

There are various types of retirement accounts available to workers in New Mexico, including 401(k)s, IRAs, pensions and government employee plans. They all have their own set of rules and regulations related to division, and determining how contributions will be split during a divorce requires tailored advice from a lawyer who is experienced with divorce law in Albuquerque (https://kufferlaw.com/albuquerque/divorce-lawyer/). 

Valuing retirement accounts

To ensure an equitable division of retirement accounts, one must first determine the applicable value of each account. The court will consider many factors, including the length of the marriage, the financial contributions that each spouse made, whether either party forfeited their earning potential to raise the family, and the future financial needs of each party. 

In many cases, decisions related to the division of retirement accounts will be clarified in a legal document known as a Qualified Domestic Relations Order (QDRO). [2] This defines which individuals other than the owner of the retirement account are entitled to a predefined portion of that account. This can include spouses, former spouses, children or any other nominated beneficiaries.

QDROs are very important for ensuring compliance with relevant laws that govern the division of retirement benefits and must be carefully drafted by a legal specialist and approved by the court to guard against future misunderstandings or complications.

It is important to note though that a QDRO must also be approved by the retirement plan’s administrator, so even if the divorcing couple and the court are in agreement regarding its content, it can still be rejected for failing to abide by the terms of the retirement plan or applicable law for that particular type of division. This can lead to delays, increased costs, and permanently lost benefits, so it is recommended that couples seek advice from an attorney early in the process and follow their recommendations. 

The tax implications of dividing retirement accounts

Dividing the value of retirement accounts before they mature can have significant tax implications, so it is important that divorcing couples seek advice that is tailored to their particular situation from a tax professional to ensure that all consequences are fully understood and appropriate plans are put in place prior to completing the divorce proceedings. 

To avoid incurring any penalties for early withdrawals, which will ultimately reduce the value of the marital estate, it may be necessary to reserve the division of certain types of retirement accounts for a later point in time. An experienced family law attorney will be able to advise their client on the best way forward and provide them with tailored advice that is specific to their individual circumstances.

In conclusion, dividing retirement accounts during a divorce is a very complex process that requires professional legal guidance and financial advice to ensure a fair and informed outcome. Couples should investigate the terms of any applicable retirement accounts as soon as possible and be forthcoming with their legal and financial advisors so that appropriate decisions can be made to safeguard the financial futures of both parties.

At the Law Office of Dorene A. Kuffer, we can help you overcome the challenges of dividing your marital assets and achieving a fair outcome during your divorce. We will highlight all legal and financial implications of the divorce and help you to achieve financial and emotional security.


[1] https://www.cnbc.com/select/how-401k-ira-retirement-accounts-are-divided-in-divorce/
[2] https://www.investopedia.com/terms/q/qdro.asp#:~:text=A%20qualified%20domestic%20relations%20order%20(QDRO)%20is%20a%20legal%20document,account%20owner’s%20retirement%20plan%20assets.