Divorce can have a serious impact on your life and in particular your retirement plan. More often than not, when you go through a divorce, a large percentage of your shared assets include your retirement accounts. This often leads to the question, “Will my spouse get my IRA in a divorce?”
In this article, I will discuss what it looks like to divide IRAs in divorce, and whether you should use your IRA to pay for your divorce. I’ll also discuss smart retirement strategies for women, and importantly, what you should do with your IRA post-divorce.
How Does Divorce Law Divide IRAs?
Unlike 401ks or other qualified plans, IRA accounts are divided under what is called a transfer incident to divorce when a divorce is completed.
Any financial firm that handles your IRA may do things a little differently, but what’s important is that they will not require a qualified domestic relations order (QDRO).
With your IRA, your divorce will need to be finalized and a divorce decree will be necessary. The good news is that this is not a taxable transfer because it is part of a divorce settlement. However, if the receiving spouse decides to withdraw money from the account, this will incur taxes and may incur early withdrawal penalties.
How much will each spouse receive? It is important to learn whether you live in an “equitable distribution” or “community property” state and what that means for dividing up your retirement accounts. Other factors may come into play such as contributions made to the account during the marriage. If your spouse is willing, you may be able to offer cash or securities in non-retirement accounts instead of giving up a larger part of your IRA. It is important to consult and ask this of your attorney as well as a financial advisor who specializes in divorce, like a certified divorce financial analyst or certified divorce financial planner.
Should I Use My IRA to Pay for My Divorce?
Paying for a divorce can be incredibly costly and since retirement may seem to be a long time away, it is tempting to withdraw money for legal and other expenses of a divorce. However, you must know, withdrawals from an IRA before the age of 59 ½ may result in a penalty if you don’t qualify for an exception.
In addition, draining your retirement account could also jeopardize your financial future.
Make sure you have considered all other avenues before using your IRA for legal fees. IRAs are tax-advantaged accounts that can help your savings grow and your investments can compound over time. Depleting these types of accounts too early can have a huge impact on what you are able to accumulate over the long term.
If you are dealing with divorce you’ll want to know how to structure and sequence the many To-Do’s facing you. Check out “The 55 Must Do’s on Your Modern Divorce Checklist.
Retirement Saving Strategies for Women
Women face various and unique challenges that can seriously affect their ability to save and invest along the way. First, women on average remain the primary caregivers for children or aging family members and therefore move in and out of these roles throughout their lifetimes.
Second, women tend to lean toward a more conservative approach to investing which can limit the growth of their wealth over time. Because of the gender pay gap, women are not able to contribute as much on average to their retirement accounts which results in lower wealth over time. Finally, women’s lifespans are increasing along with the costs of healthcare which means their dollars need to stretch longer than they have in the past.
Here are a few strategies that women can use to combat some of these issues:
- Contribute as much as possible to employer-sponsored retirement plans while working.
- If you do not have a retirement plan through work but have earned income consider opening an IRA and maximizing contributions.
- If self-employed, even part-time, consider a SEP IRA
- Participate in a Spousal IRA (if eligible)
- Create a budget and make sure you are staying on track.
- Work with a financial advisor to help you find the appropriate mix of investments to help you achieve your long-term goals.
- Consider rolling over any 401(k) or other employer-sponsored retirement plans from previous employers into an IRA for more investment choices and streamlined account management.
To understand more about what women face when dealing with divorce, consider reading “What Divorce Does to a Woman.”
Your IRA Post Divorce
After the accounts are divided and your divorce is complete, the first thing you should do is review your beneficiary designation. It is all too common for an Ex to be left as a beneficiary on an account long after a divorce has been finalized. While your assets outside of your retirement accounts will pass to your beneficiaries based on what you specify in your will, a retirement account will pass to the designated beneficiary on file at the brokerage firm that holds your IRA.
Seek Advice from a Financial Professional
Before and during your divorce it is smart to consult with a financial advisor to make sure you optimize your best financial situation for the splitting of assets. And certainly, after you finalize your divorce, it is important to seek the advice of a financial professional who can help you understand your new priorities and work with you to achieve your desired retirement lifestyle.
Everyone faces similar challenges when creating a long-term retirement plan, however as mentioned earlier, women often juggle multiple roles both at home and at work, they tend to lean toward a more conservative investment approach and on average have a longer life span than men. All of these factors make planning for your retirement more important and more complicated than ever.
Christine Healy is a Senior Financial Advisor and Resident Director with Merrill Lynch. Licensed in all states, she holds the Certified Divorce Financial Analyst® Designation and dedicates a portion of her practice to guiding individuals through the financial implication of divorce. Licensed in all states, you can contact Christine here to support your needs and goals as a woman dedicated to rebuilding your best life after divorce.
Since 2012, SAS for Women is entirely dedicated to the unexpected challenges women face while considering a divorce and navigating the divorce experience and its confusing afterward. SAS offers women six FREE months of email coaching, action plans, checklists, and support strategies for you, and your future. Join our tribe and stay connected.
*To learn what a divorce decree is, read here.