When facing divorce, many people focus on dividing the house, cars, and bank accounts. However, retirement accounts often represent one of the largest assets in a marriage, and understanding how they’re divided is essential to protecting your financial future. If you’re going through a divorce in North Carolina, knowing what happens to your 401(k), IRA, pension, or other retirement savings can help you make informed decisions during this challenging time.
Are Retirement Accounts Considered Marital Property in North Carolina?
North Carolina follows the principle of equitable distribution, which means marital property is divided fairly (though not always equally) between spouses. The key question is whether your retirement account qualifies as marital property.
Generally, any portion of a retirement account earned during the marriage is considered marital property, regardless of whose name is on the account. This includes 401(k)s, IRAs, pensions, military retirement benefits, and other retirement savings plans.
For example, if you started contributing to your 401(k) five years before marriage and continued for ten years during the marriage, only the value accumulated during those ten married years (plus any investment growth on those contributions) would typically be subject to division.
Retirement funds earned before the marriage or after the date of separation are usually considered separate property and remain with the person who earned them.
How Does North Carolina Divide Retirement Accounts During Divorce?
What Is a QDRO and Why Do You Need One?
A Qualified Domestic Relations Order (QDRO, or Domestic Relations Order (DRO) is a legal document required to divide most employer-sponsored retirement plans, including 401(k)s, 403(b)s, and pensions, without triggering taxes or early withdrawal penalties.
The QDRO/DRO instructs the retirement plan administrator to pay a portion of the account holder’s benefits to the former spouse (called the “alternate payee”). Without a properly executed QDRO/DRO, you cannot access your share of your ex-spouse’s retirement plan, even if your divorce decree or separation agreement states you’re entitled to it.
Each retirement plan has specific requirements for QDROs/DROs, so these documents must be carefully drafted to comply with both the plan’s rules and federal law. A QDRO/DRO can be submitted to the plan administrator for preapproval before entry by the court , and once approved and entered by the court, the division can be implemented.
It’s important to note that IRAs don’t require a QDRO/DRO. Instead, they can be divided through a process outlined in your divorce decree or separation agreement, typically through a trustee-to-trustee transfer.
Can You Avoid Taxes and Penalties When Dividing Retirement Accounts?
One of the biggest concerns people have about dividing retirement accounts is the potential tax burden. Fortunately, when done correctly, you can divide most retirement accounts without immediate tax consequences.
For employer-sponsored plans divided by QDRO/DRO, the receiving spouse can typically roll their portion directly into their own retirement account tax-free and penalty-free. Alternatively, they can take a cash distribution without the usual 10% early withdrawal penalty (though income taxes would still apply).
For IRAs, a transfer incident to divorce is not taxable as long as it’s properly documented in your divorce decree or separation agreement and completed as a direct transfer between accounts.
However, mistakes in this process can be costly. If retirement funds are withdrawn incorrectly or if paperwork isn’t filed properly, you could face unnecessary taxes and penalties. This is why working with a knowledgeable family law attorney is so important.
What About Pensions and Military Retirement Benefits?
Pensions and military retirement benefits require special consideration because they provide future income rather than a rollover of a portion of the current account balance.
For traditional pensions, the marital portion is typically calculated using a formula that considers how much of the pension was earned during the marriage. The non-employee spouse usually receives their share when the employee spouse retires and begins receiving benefits, though some plans allow for immediate offset or lump-sum payments.
Military retirement benefits can be divided in divorce, but special federal rules apply. The Uniformed Services Former Spouses’ Protection Act allows states to treat military retirement pay as marital property, but the service member must have completed at least 10 years of creditable service during the marriage for direct payment from the Defense Finance and Accounting Service (DFAS). Dividing military retirement benefits for shorter marriages is possible, but payments will not come directly from DFAS.
How Can Eatmon Law Firm, PC Help Protect Your Retirement Assets?
Dividing retirement accounts in a North Carolina divorce involves complex legal and financial considerations. A small error in documenting the division or obtaining a QDRO/DRO or other order providing for division of a retirement account can have significant long-term consequences for your financial security.
At Eatmon Law Firm, PC, we understand how important your retirement savings are to your future. Our experienced family law attorneys guide clients through every aspect of property division, including the proper handling of retirement accounts. We work carefully to ensure that divisions are fair, properly documented, and executed in a way that protects your interests and minimizes tax consequences.
Whether you’re negotiating a separation agreement or preparing for court, we can help you understand your rights so you can make informed decisions about your retirement assets.
Located in Wake Forest, NC, Eatmon Law Firm, PC serves clients throughout Wake, Durham, Franklin, and Granville Counties. Contact us at 919-435-0565 to schedule a consultation and learn how we can help you protect your financial future during this transition.