If you’re an Alabama resident who is going through a legal separation or divorce, you will likely have to split your retirement assets with your spouse. However, there are some situations where all the assets will go to one party once the divorce is final. There are different rules for qualified plans and IRAs when it comes to distribution and division. Whether you are receiving funds or giving them up, it is important to understand the rules associated with dividing accounts in a divorce.
Transfer incident to divorce versus qualified domestic relations Order
Even if you and your spouse are dividing your qualified plan and IRA funds in the same manner, there are separate legal terms that apply to each of these actions. IRAs are split using a “transfer incident to divorce.” Qualified plans like a 401(k) are divided under a “qualified domestic relations order.”
Courts often confuse the distinction between the two divisions by classifying both as qualified domestic relations orders. Still, you and your spouse have to clearly dictate which categories your retirement assets fall into when you submit your documentation to the mediator or judge. This will ensure that the information is correctly listed on your separation or divorce agreement.
Designating your beneficiaries
After you receive or send your qualified plan or IRA assets, make sure you update your beneficiaries. Your former spouse will likely not be one of your beneficiaries unless this is required in your divorce decree. Make sure that you update the beneficiaries on all your financial assets as well, such as life insurance or annuities.
If your children will now be your primary beneficiaries or you are getting remarried, it may be best to create a revocable living trust so that the trust can be the primary or secondary beneficiary of your account or retirement plan. During divorce negotiations, you’ll want to consult with an experienced family law attorney to assist you in making sure your retirement assets are distributed according to your specifications.