Protect Retirement Assets in a Maryland Divorce

When people are trying to deal with the immediate challenges that going through a divorce can bring, they may not be considering planning for their long-term needs. However, when dividing up assets as part of the property division that accompanies divorce, people need to ensure that they have enough of the family's retirement savings to secure their futures. Maryland couples should understand how the law views retirement assets and how the court divides those assets in the event of a divorce.

Marital Property

All income that spouses earn during marriage is marital property. When deposits into defined contribution plans such as 401(k), 403(b), or 457 plans, or IRAs or SEPs are made with marital funds, the money in those accounts is also marital property. Vested pension plan benefits are also marital property.

If one spouse entered the marriage with money already in a retirement account, that money would be non-marital property. However, the spouse claiming a portion of a retirement account as non-marital property is responsible for tracing those funds and proving the amount that is non-marital.

Maryland is an equitable distribution state, which means that the court divides marital property in the way it deems most just - not necessarily equally. The court will apportion retirement assets in light of other property each spouse is receiving from the marital estate, as well as a number of other factors the court weighs when dividing property.

Dividing Retirement Assets

Federal law governs the distribution of pension, 401(k) 403(b), and 457 plan assets. If such accounts are part of the marital estate, the court will have to issue a Qualified Domestic Relations Order for the plan administrator to be able to allot any funds from the accounts to a non-employee ex-spouse.

The QDRO not only gives permission to a plan administrator to disperse funds, it allows the non-employee ex-spouse to deposit the money into another retirement account without paying the penalties for early withdrawal that accompany these accounts.

IRA and SEPs do not require QDROs to split the assets in them. However, the divorce decree needs to contain specific language noting that withdrawals from the account and deposits into the ex-spouse's retirement account are in accordance with Section 408(d)(6) of the Internal Revenue Code and are therefore tax-free. If that is not in the decree, the withdrawing spouse would not only have to pay early withdrawal penalties, but also income tax on the amount he or she withdraws because these accounts are filled with pre-tax money and are taxed as income when people begin to draw on them.

Consult an Attorney

Dividing retirement assets and other property in a divorce can become extremely complex. Those going through divorce need the assistance of a lawyer with broad experience in property division and financial matters. If you have questions about divorce and property division, contact a seasoned family lawyer who can discuss your situation with you.