When dividing assets in a divorce, your retirement benefits require special attention. Even in a community property state like Arizona, there are complications involved in valuation and allocation of these assets, which can be among the most significant for your future financial security.

Regardless of whether you or your spouse are the titled owner of a retirement account, it may be community property, at least in part. Any contributions you made to your retirement accounts before your marriage are generally considered your separate property and are not subject to division. However, the funds contributed and the growth in value that occurred during the marriage are typically considered community property, meaning they will be divided between you and your soon-to-be-ex-spouse. The exact cutoff date for what is considered "during the marriage" can vary by state, sometimes it's the date of separation, and for others, it's the date the divorce is finalized.

For retirement plans governed by ERISA, like 401(k)s and pensions, a specific court order called a qualified domestic relations order (QDRO), is essential. This court order allows a transfer in ownership of retirement funds from one spouse to the other without the tax liability that is otherwise triggered by withdrawing funds prior to retirement ages. It instructs the plan administrator on how to divide the assets and to pay a portion to your former spouse. 

Individual retirement accounts (IRAs) and Roth IRAs are not governed by ERISA, so they don’t require a QDRO. These can usually be divided through a process called a "transfer incident to divorce," which involves submitting a form and a copy of your divorce decree to the financial institution holding the account. This allows for a tax-free transfer of assets to your former spouse's IRA.

When it comes to the actual division, you have a few options. You could agree to an "offset," where one of you keeps the entire retirement account in exchange for other marital assets of equal value, like the family home. Another option is to split the account, where your former spouse can either take a cash distribution (which may have tax consequences) or roll their share into their own retirement account.

Don't forget to update your beneficiaries on all your accounts after the divorce is finalized. Forgetting this step is a common mistake that can have unintended and often heartbreaking consequences for your loved ones down the road. Given the complexities and potential tax implications, it is highly recommended to consult with an Arizona divorce attorney who has experience with dividing retirement assets to ensure your financial future is protected.

If you are contemplating divorce and have questions about property division or other issues, contact Clark & Schloss Family Law, P.C. for a consultation at our Scottsdale office. You can reach us by phone at 602-789-3497 or contact us online.