In any Michigan divorce, the parties have to disclose all their assets and debts, and then divide the marital property in accordance with state law. This is always a daunting task, but some types of property are easier to divide than others.
It’s relatively simple to divide an ordinary checking account: Just close the account and divide the funds according to the divorce settlement. Even real estate can be sold, and the proceeds divided between the parties. But for some types of assets, this type of division is not an option.
Penalty for early withdrawal
Retirement accounts are among the trickiest assets for property division in a divorce. Most retirement accounts, such as 401(k)s, IRAs and pension funds, are intended to be tucked away until after the owner retires or reaches a certain age. If the owner withdraws the account before the required time, they will face significant penalties from the financial institution. What’s more, the government typically does not tax these accounts, so long as the owner does not withdraw from them until after retirement. If the owner withdraws early, their interest in the account will be taxed. Together, these penalties and taxes can eat up most of a person’s retirement account.
So, how can a person divide a retirement account without incurring these penalties? The common way to do it is through using something known as a Qualified Domestic Relations Order, or QDRO. This is a court order that tells the financial institution to divide the account between the parties, leaving it as though there were two accounts, one for each party.
Why do I have to divide my retirement account?
At this point, you may be asking, “Why do I have to divide my retirement account with my ex?” Perhaps you started the retirement account before you got married, and contributed funds through it through your salary. Do you have to share this with your ex? The answer is somewhat complicated.
Under Michigan law, the marital property includes almost everything the spouses acquired during the marriage. This can include contributions to a retirement account during the marriage, as well as interest earned on the account during the marriage. This interest and these contributions must go into the proverbial pile of assets in the marital property, and must be divided in divorce.
As we have seen, retirement accounts typically must be divided in a divorce. And as we have seen, it’s easy to destroy the value of a retirement account if you don’t do it properly. A QDRO provides a good way around this problem, but the whole process of getting and executing the QDRO process is not easy. All those going through a divorce should speak to a skilled family law attorney about their options for dividing retirement accounts in a way that is fair and preserves as much value as possible.