Splitting a 401K or IRA in a divorce can be complicated and is often left up to the courts, but there are steps that you should take before your divorce begins. Here are 7 key facts about splitting IRAs & 401Ks in a divorce.

The “ira contribution limits 2021” is a key fact about splitting IRAs and 401Ks in a divorce. This article provides 7 key facts about IRAs and 401Ks, so that you can make the best decision for your situation.

7 Key Facts About Splitting IRAs & 401Ks in a Divorce

When it comes to sharing marital property after a divorce, one of the most frequent areas where mistakes are made is in the allocation of retirement funds. Individual retirement accounts (IRAs) and 401k accounts are often confused. Both plans are for retirement.

However, there are some significant variances. You might be making a major tax blunder if you don’t account for those discrepancies throughout your divorce. 

In a divorce dispute, there are seven important distinctions between IRAs and 401ks that you should be aware of.

1. A QDRO is not required to split an IRA. 

To access your ex-401k spouse’s after a divorce, you must offer the plan administrator a qualifying domestic relations order (known as a QDRO).  

A QDRO is a judgment, decree, or court order that allows a ‘alternative payee’ to receive a part or all of a retirement plan’s benefits. The ex-spouse of the retirement plan member might be an alternative payee. It might also be a kid or another dependency.   

The interested lawyers, generally the divorce attorney representing the non-employee spouse, write a QDRO. Once the lawyers have reached an agreement on the QDRO, the document is submitted to the proper jurisdiction (such as a court).

Following that, either as part of the divorce judgment or as a separate order, the QDRO is issued.  

Finally, the retirement plan administrator receives the QDRO. The administrator is responsible for determining whether the order ‘qualifies’ or needs to be changed. 

Needless to say, there are several factors at play here, as well as numerous ways for this process to go wrong. When splitting a 401k, a qualified QDRO attorney can recognize and assist you avoid these traps.  

This approach is available to all qualifying retirement plans, not just 401ks.

None of this, however, applies to an ex-IRA. spouse’s IRAs are regarded differently than qualified plans, regardless of whether they are conventional or Roth.

Only a copy of the divorce decree is required by the IRA custodian. The IRA should be distributed according to the terms of the divorce agreement. 

The easiest approach to do this is to declare the IRA distribution as a transfer consequent to the divorce. A direct trustee-to-trustee transfer or rollover of IRA money into the former spouse’s own account will ensue as a consequence of this.   

Consider the case of Kevin and Anne, who are getting divorced.  

Kevin’s IRA will be split 50/50 between Anne and Kevin. Kevin’s IRA is worth $100,000 right now. Anne’s share of the divorce settlement should be specified in the divorce order. 

The greatest thing Anne might do is give the caretaker with a copy of the divorce decree. Anne would next request that her part be moved to her own IRA.  

The custodian should open a new IRA for Anne if she does not already have one. Anne’s IRA would get a straight transfer of $50,000 in this situation. This IRA transfer should not be taxed if done properly.   

To put it another way, separating an IRA is more easier than dividing a 401k. However, there are certain restrictions, especially if you need to make money. 

2. A 401k withdrawal made pursuant to a QDRO is exempt from the 10% early withdrawal penalty. 

Let’s talk about the early withdrawal tax penalties for IRAs and 401k plans before we go any farther.  

The IRS levies a 10% early withdrawal penalty on withdrawals from a retirement plan before reaching the age of 59 12. This tax penalty is in addition to any applicable federal income taxes. 

If the account owner dies or becomes permanently incapacitated, there are several exceptions. Internal Revenue Code 72(t)(2) outlines one of such exclusions (C). Payments to alternative payees under a qualified domestic relations order are an exception.  

This exemption, however, clearly only applies to eligible retirement plans. A qualifying plan is not an IRA.   

You may split an IRA without a QDRO since it is not a qualified plan. This also implies that IRA assets are not covered by this exclusion. 

Let’s pretend Anne need $10,000 in cash in the case above. Because she and Kevin are both 45, they would be liable to the IRS’s 10% early withdrawal penalty.  

Anne would owe taxes on the $10,000 withdrawal (at her regular income tax rate) additional $1,000 (10 percent of the $10,000 withdrawal) if she took $10,000 from her IRA portion. 

Let’s pretend Kevin has $100,000 in his 401(k) at work. Anne might have a QDRO made as part of the divorce settlement stating that $10,000 should be handed directly to her. Anne’s 401k withdrawal would be subject to the same taxes as her IRA withdrawal.  

Anne, on the other hand, would escape the $1,000 early withdrawal penalty for IRA funds.

This presupposes that the withdrawal is made in accordance with a QDRO, which is a key difference. You could be tempted to take a shortcut if you have an urgent financial requirement and the QDRO is taking too long.  

Instead of tapping into your qualified plan without a QDRO, you could be better off looking for another source of funds.

3. There is still another early withdrawal exemption for 401ks.

The early withdrawal regulations for IRAs apply to anyone under the age of 59 1/2. There are few exceptions that allow for penalty-free early withdrawals. There are no exclusions depending on age. workers in a governmental defined benefit plan who work in public safety for a state or a political subdivision of a state)

One of the exclusions for qualifying plans is departure from service. If an employee leaves the firm, the IRS states that he or she may withdraw from the company plan without penalty if:

  • The employee is at least 55 years old.
  • Employees in governmental defined benefit plans who are 50 years old or older are eligible (or a political subdivision of a state).

The withdrawals are fully taxed in any instance. However, those in their 40s and 50s who are getting divorced should think about this.

4. Employer contributions may be unvested in a 401k.  

Employer matching contributions are one of the most appealing aspects of an employer-sponsored retirement plan. This gives individuals an incentive to begin saving in the first place.  

If your company matches your 3% contribution dollar for dollar, you’ll get a 100 percent return on your money even before you invest! Who doesn’t appreciate getting money for nothing? 

There’s a catch, however. There is a vesting timeline in qualified plans. In other words, before the employer’s contributions vest, the employee must work for the firm for a specific amount of time.  

If an employee departs before the employer’s contributions are fully vested, the contributions are forfeited. It’s important to note that this only pertains to employer contributions. Employee contributions are always fully vested from the start. 

A 401(k) must have a vesting schedule that is no more restrictive than any of the following to be considered a qualifying plan: 

  • Vesting for 6 years. This implies that an employer can’vest’ contributions over the course of six years. 
  • A three-year cliff. For the first two years, an employer might opt not to vest. After that, at the Conclusion of the third year, the employer must vest 100 percent of the employer contributions. 

IRS rules for qualified defined contribution plans show the difference between cliff vesting and graded vesting schedules.Cliff vs. Graded Vesting (IRS Illustration)

So, what exactly do you require? If you have unvested contributions in your 401k, you must account for them. Make sure your QDRO covers what happens to unvested employer contributions, in particular.   

There are a variety of things that might happen depending on your circumstances and relevant state legislation. A QDRO lawyer may assist you in achieving your goals. 

None of this pertains to an IRA. There are no constraints on how you may split an IRA since there are no employer contributions.   

5. Tax withholdings for IRAs and 401k plans are different.

A 401(k) plan is required by law to withhold 20% of any payout provided to the plan member. This happens with every 401(k) payout that isn’t moved straight to another qualifying plan or an IRA account. No taxes are withheld if the payout is delivered straight to a qualified plan or an IRA. 

For an IRA payout, however, the default withholding is 10%. According to the IRS, you may opt out of withholding or specify a different amount to be withheld. 

If cash flow is a concern, this difference is critical. Consider a $10,000 401(k) or IRA withdrawal.

Taxes would be deducted from your 401k by 20%. This leaves you with $8,000 out of a total of $10,000.

IRA: The default withholding for taxes would be 10%, or $1,000. If you wanted to, you could alter this to zero. That implies you may withdraw the whole $10,000.

Is your tax burden going to change? No. If you required the entire $10,000 right now, you’d have to tap into your 401k plan. As a consequence, the tax bill would be larger.

6. Various creditor protection laws are in effect. 

The Employee Retirement Income Security Act of 1974 protects qualified plans, such as 401(k) plans, against creditors (ERISA). In most cases, there is no limit to how much money you may put into a 401(k) plan. 401(k) plans are also safe in both bankruptcy and non-bankruptcy situations.

The following are two exceptions: 

  • IRS. While the IRS may prioritize other financial assets, retirement plan assets are not off the table. 
  • Proceedings for divorce 

Retirement savings in a 401(k) plan are not only protected in bankruptcy situations, but they are also safeguarded if you transfer them over to an IRA. Again, there is no end to this protection.

This does not apply to assets in a single 401(k). 

IRAs, on the other hand, are protected in bankruptcy proceedings under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). There is a limit to BAPCPA protection. However, there is a monetary restriction. 

That maximum was $1,362,800 at the time of writing. There are, however, certain extra restrictions: 

  • In non-bankruptcy proceedings, IRAs are not protected by the federal government. 
  • There is no federal bankruptcy protection for inherited IRAs. 

By no means is this a complete list of creditor protection variations. If you intend to deal with creditors and/or declare bankruptcy, talk to your lawyer or a bankruptcy attorney about your worries.  

You’ll be able to evaluate these aspects as part of your fair allocation in this manner. 

7. You don’t have to start collecting 401(k) payouts at the age of 72.  

Gray divorce didn’t exist 30 years ago, therefore this sentence was superfluous. Gray divorce, on the other hand, has become more common in recent years, especially among those aged 65 and over. Furthermore, according to a recent AARP research, more individuals are working beyond retirement.  

Given these two developments, it’s critical to consider how required minimum distributions (RMDs) may affect divorce preparation.

You may delay payouts for a short period in both 401(k) plans and regular IRAs. A taxpayer who reaches the age of 72 must begin drawing payments from either plan each year for the remainder of his or her life. To do so, the taxpayer must use an IRS spreadsheet to compute their RMD.

An “IRA Required Minimum Distribution Worksheet” is the name of this worksheet. IRAs and 401ks both utilize the same spreadsheet, despite their names. The regulations, however, are somewhat different. 

IRA RMD Requirements

Because there are several kinds of IRAs, the regulations for each are somewhat different.   

Traditional IRAs: Traditional IRA distributions must be made by April 1 of the year after your 72nd birthday. Without exception.   

RMDs are not required for Roth IRAs.   

Inherited IRAs: Most beneficiaries will not have to pay RMDs since inherited IRAs are now subject to a 10-year withdrawal limit.

RMD regulations apply to qualifying designated beneficiaries. These RMDs are calculated based on numerous factors:

  • Whether the IRA owner dies before or after the deadline for taking dividends 
  • Whether the spouse or a non-spouse beneficiary was the intended recipient 

IRA RMD Requirements

In general, 401k payouts must start with either: 

  • The first day of the year after your 72nd birthday, much like an IRA. 
  • The year you plan to retire

In other words, if you never retire and participate in a 401(k) plan, you will never have to take RMDs. As a result, you will never have to pay any taxes. Your beneficiaries will have to pay taxes on their withdrawals after you die.

These distinctions provide alternative tax planning options for persons who want to postpone taxes but do not intend to quit working in retirement.   


This is by no means an exhaustive summary of the differences between IRAs and 401(k) plans. However, understanding the distinctions between the two can help you decide how to split marital assets in a tax-efficient and fair way. This will assist both couples in avoiding negative tax repercussions.

The “traditional ira contribution limits” are the maximum amount of money that you are allowed to contribute to your traditional IRA or 401K in a year. The limit is $5,500 for 2018.

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