personal finance

Tricky Divorce Issue: How to Divide 401(k)s, IRAs and Annuities

The tax implications can make these assets more complicated to split in a divorce settlement.

Many things occupy your mind during a divorce. Understandably, taxes can likely fall to the bottom of the list. But there are critical tax considerations that should be evaluated, particularly when it comes to dividing qualified assets, such as 401(k)s, IRAs and annuities.

Dividing 401(k)s and Pensions

Dividing 401(k)s and pensions can seem quite complex because you need to obtain a Qualified Domestic Relations Order (QDRO), which is a court order separate from a divorce decree. A spouse has legal grounds to all or part of a 401(k), and each plan has specific benefit provisions and administrative rules. For example, some plan administrators require you to wait until retirement to officially divide the assets.

Most divorce attorneys would promote reaching an amicable agreement with your spouse. Here are four options to consider:

  1. One spouse keeps the 401(k) in exchange for another asset of equal value. This is the least complicated approach, but it requires complex tax calculations and may require negotiations to settle growth potential.
  2. Divide the 401(k). While less complicated on the surface, a deeper understanding of the plan is required, which extends time and effort.
  3. Liquidate the 401(k) to pay one spouse. This is generally the least desirable approach because of taxes, potential penalties and need for legal approval. Not everyone may qualify for this approach either.
  4. Roll the 401(k) into an IRA. A rollover avoids penalties and tax liability and gives the recipient self-direction of account management. That said, this option is limited to those who have left their employer or are over age 59½.

As for pensions, they are generally considered jointly owned. Most pensions will pay benefits directly to former spouses, and payments can typically be made for the life of the employee or retiree, as well as after death (whether it occurs before or after retirement). The rules relating to the division of pensions are complicated and vary from state to state and retirement system to system.


  • Discuss tax consequences with your CPA and financial planner.
  • Ask your plan administrator for guidance around the QDRO, including model copies, guidelines and a preparation checklist.
  • Share all information with your lawyers and have the QDRO prepared in time for divorce. Sign the QDRO with the separation agreement (and definitely before the divorce decree).
  • Factor your spouse's benefits into your negotiations.

Splitting IRAs (Traditional and Roth)

Dividing IRA assets is generally considered more straightforward, although it is subject to community property state rules that may differ from state to state. If the IRA was opened during the marriage, it is considered a marital asset. If the IRA pre-existed the marriage, contributions made during the marriage with joint funds may be considered marital property. However, inherited IRAs are usually considered separate property, unless commingled with marital assets. 

The rules governing splitting IRAs are consistent, whether it’s a traditional, SEP, Simple or Roth IRA. The only notable difference is that because Roth distributions will ultimately be tax-free, the evaluation of value may be impacted, depending upon whether you use pre-tax versus after-tax valuation in your negotiations. Also, dividing IRA assets requires a divorce decree, but a QDRO is not required.

The most efficient way to divide an IRA is to do a trustee-to-trustee transfer, which moves assets from one spouse’s IRA to the other spouse’s account. This can be beneficial because you will avoid the 10% early distribution penalty (if younger than 59½) and taxes.


  • The IRA owner is responsible for dividing the IRA, not the custodian, which means it is your responsibility to understand any court mandates.  As such, the IRA owner may also need to provide specific instruction to the custodian and should coordinate with the custodian before finalizing any paperwork.
  • Make sure the divorce decree is accurate, and if it is missing any pertinent information — such as how and when assets are split — have it revised.
  • Your divorce attorney may not be well-versed in IRAs, so consult with a CPA or tax attorney.

Splitting Annuities (or Not)

Annuities typically require complicated calculations and tax implications, but ultimately their division is contingent upon what is negotiated by the involved parties. In fact, “how” to split annuities becomes the more critical piece after the agreed-upon percentages are decided. The biggest issues are tax consequences, penalties and surrender fees, but there are IRS exceptions for divorces, so these concerns may be avoided.

The most common way to divide annuities in a divorce is to start a new contract by withdrawing from the existing annuity and creating two new contracts (or one contract if the annuity is not being divided and is instead being given to one spouse). This method has the least tax implications because the IRS treats these transfers as non-taxable events. Remember though that the new “owner” will pay income tax on distributions.

An alternative method would be to withdraw via a sell or surrender transaction, where one spouse withdraws a portion or all of an annuity and distributes the proceeds. This is an easy calculation, but it may result in reduced benefits, taxes, surrender fees or a new surrender period. If the annuity resides in an IRA, you can exercise a transfer through a direct rollover, which is easy to execute with fewer tax implications.


  • Consult with your financial adviser.
  • Ask your annuity carrier how they handle dividing contracts in divorce.
  • Consider having one spouse keep the annuity in exchange for another asset of equal value.

Of course, state laws impact how different types of assets are split. For example, residing in a community property state, as opposed to a separate property state, adds wrinkles to the process, which is why it is imperative to consult with your financial and tax advisers.

Navigating a divorce is not easy. When it comes to dividing qualified assets, it’s worthwhile to approach it methodically. The good news is there are experts who help you develop a thoughtful and resilient plan that protects you and your assets.

SEI Private Wealth Management is an umbrella name for various wealth advisory services offered through SEI Investments Management Corporation (“SIMC”). The information contained in this communication is not meant to substitute for thorough estate planning and is not meant to be legal, tax, insurance and/or estate advice.
Neither SIMC nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax adviser.

About the Author

Steven Wittenberg, JD, MBA, LLM in Tax

Director of Legacy Planning, SEI Private Wealth Management

Steven B. Wittenberg, JD/MBA/LLM, is Director of Legacy Planning for SEI Private Wealth Management, a business unit of SEI Private Wealth Management that provides private wealth management solutions, serving high-net-worth individuals and families.

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