How Are Retirement Accounts Divided in a Divorce

A retirement account becomes marital property in a Montgomery County divorce at the point the spouses get married. The court then divides the account equitably. This does not always mean the account is split in half. A judge divides a retirement account based on the needs, education, age, and health of the spouses. It will also consider the length of the marriage, standard of living during the marriage, and contributions of both spouses to one another.  Retirement Accounts in a Divorce

A retirement plan or benefits that a spouse has established before the marriage is deemed separate property. It is not divided in divorce proceedings unless the spouses requested this occur in a prenuptial or postnuptial agreement. The interest or appreciation on these accounts that accumulates during the marriage is also the separate property of the spouse that established the account.

Retirement assets typically include the following:

  • 401(k)
  • traditional IRA 
  • Roth IRA 
  • private pension
  • state pension
  • federal pension, including a military pension 

A pension and 401(k) are usually divided by a judge’s qualified domestic relations order (QDRO). A QDRO can cover more than one retirement account or plan. An IRA is divided by the “transfer incident to divorce” process. This means the funds in the IRA are divided and termed a transfer or a rollover. A transfer involves a transfer of funds into the same type of account, such as funds from one traditional IRA into a different traditional IRA. A rollover involves a transfer of funds into a different type of account, like funds from a traditional IRA into a Roth IRA. 

After a transfer or rollover, the spouse receiving funds pays taxes on distributions they take out of the account. The spouse providing funds does not owe taxes on the assets. If the spouse providing funds does not label the division as a transfer incident, they will owe the tax and an early withdrawal penalty, if this applies, on the whole amount that the other spouse received. The spouse providing funds must list the division percentage breakdown, the amount of IRA assets, the IRA providing account number, and the IRA receiving account number.

If a spouse establishes a retirement account before the marriage and continues to contribute into the account after the marriage, the spouses may need to hire an accountant to determine what portion of the account and interest from it is deemed marital property. The spouses can also negotiate this and form an agreement about it that they state in the marital settlement agreement (MSA). If they do not agree on a division, the court will determine the appropriate portion for each party. 

If spouses legally separate before marriage, the assets that a spouse accumulates after the legal separation are deemed separate property. When a retirement account is established during the marriage before the legal separation, it is considered marital property. But money put into the retirement account after the legal separation is separate property. A retirement account established after the legal separation is separate property. The spouses may need an accountant to determine what portion of the account and interest from it are separate property. 

In Alabama, before 2018, a judge could only divide a retirement account in a divorce proceeding if the spouses had been married for at least 10 years. The law has changed. Now a judge may divide a retirement account between the spouses if the couple has been married less than 10 years. However, the laws on this can change from time to time, so it is best to consult with a local divorce lawyer in Huntsville before reaching any agreement in your divorce.

If a party disagrees with the court’s ruling, they can appeal the ruling to the Court of Civil Appeals. The party may file a motion to alter, amend, or vacate an order regarding the division of the retirement accounts. The party must show that the trial judge made an error in their ruling. 

Funds from a retirement account distributed into the marriage constitute property. They are not alimony. A person who is receiving alimony payments from their former partner will stop receiving such payments if they remarry. A person who received a portion of the retirement account from their former partner in the divorce does not have to give back the money if they remarry. 

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