How individual retirement accounts (IRAs) play into the division of assets part of a divorce depends in part on the type of IRA. There are several different types, both of personal IRAs and employer-sponsored IRAs. A divorce mediator or a Certified Divorce Financial Analyst can help you understand these accounts and your options concerning them when working out a divorce settlement.
There are three main types of personal retirement plans:
- traditional IRAs;
- Roth IRAs; and
- Deferred annuities.
Traditional IRAs are funded with pre-tax dollars. The account value isn’t subject to taxation until funds are withdrawn. Withdrawals before age 59 ½ are subject to a 10% penalty, with a few exceptions. A QDRO isn’t required to divide a traditional IRA. Your settlement agreement, incorporated into your divorce judgment, is sufficient.
Roth IRAs are funded with after-tax dollars. In general, the account value isn’t subject to taxation when funds are withdrawn, if you’ve held the account for five years and meet certain conditions. As with traditional IRAs, withdrawals before age 59 ½ are subject to a 10% penalty with a few exceptions. As with traditional IRAs, you can divide a Roth IRA with a divorce judgment, without the need for a QDRO.
A deferred annuity is a contract you make with an insurance company. The company promises to make payments to you, normally monthly, beginning at some future date. Only when the payments begin is the account value appreciation subject to taxation. A divorce judgment is sufficient to divide a deferred annuity.
Employer-Sponsored IRA Types
There are two types of employer-sponsored IRAs:
- SEP IRAs and
- Simple IRAs.
Simplified Employee Pension (SEP) IRAs are company retirement plans held in the form of individual traditional and Roth IRAs. The considerations above for traditional IRAs and Roth IRAs apply here as well.
Simplified Incentive Match Plans for Employees (Simple IRAs). An employer and an individual agree to reduce compensation and have the reduction contributed to a SIMPLE IRA account. The employer makes matching contributions or nonelective contributions. Nonelective contributions are made for each eligible employee, even if the employee does not choose to contribute. The distribution rules applicable to traditional IRAs also apply to Simple IRAs, except that there can be a higher penalty for early withdrawals. Also, during the first two years of participation, a transfer of funds can only be made to another Simple IRA (and not to a rollover IRA). A divorce judgment (without a QDRO) is sufficient to divide a Simple IRA.
A rollover IRA is an account that is set up to receive the transfer of monies from an old employer-sponsored retirement account (such as a 401k) to a traditional IRA. The purpose of a rollover IRA is to maintain the tax-deferred status of those monies. The comments above concerning traditional IRAs apply to rollover IRAs.