For many people who have been working for some time, retirement accounts are large assets. Because these might be subject to division during divorce, it is important to understand the differences between different types of plans.
One of the main splits in retirement assets is Roth versus traditional. Most types of accounts can be either one format or the other.
Roth accounts, of which IRAs are among the most popular, use post-tax money. This allows people to withdraw from the plan after retirement without paying any more taxes. This means that all else being equal, one dollar in a Roth account is more valuable than one dollar in a traditional account.
The most familiar traditional retirement fund is the 401(k). These plans typically use an elective, tax-free deferral from an employee’s wages that an employer matches in whole or in part. In exchange for not paying taxes immediately, the employee must pay taxes when withdrawing from the plan during retirement.
Dividing retirement accounts
Although the tax structure might be different, it is quite possible for a traditional and Roth plan to hold similar assets. In a hypothetical situation in which one spouse had a traditional 401(k) and the other had a Roth IRA, both with identical holdings and dollar values, it is likely that the couple would want to value the IRA higher than the 401(k) in the interest of reaching an equitable division of property.
Of course, asset division in the real world could be more complex than this. Fighting for a fair deal sometimes means coming prepared with the details.