When couples divorce, property division is one of the main priorities right after child custody. While many couples may focus on the home and vehicles, another major point of contention is often the retirement accounts. This is especially true for couples who have been married for many years. Financial experts agree that taxation is the primary issue concerning retirement assets, and here are a few ways to avoid the taxman when those assets are divided during a divorce.
One way to avoid taxation of retirement assets during a divorce is to transfer funds between IRA accounts. The funds can be transferred between one spouse’s IRA to the other’s during a divorce, but it must be done a specific way. The transfer must be laid out in detail in the divorce decree or other written agreement that is part of the divorce. The timing is also very important. Should the funds be transferred into the other spouse’s IRA before the divorce is final and before he or she is 59 and 1/2 years old, then that spouse will be required to pay an early withdrawal penalty of 10 percent. It’s best to contact the financial institution and speak with them about their process for transferring IRA funds.
Another way to transfer retirement funds is by using a qualified domestic relations order, otherwise known as a QDRO. This is generally used for pensions, and 401ks. It will allow the funds in these accounts to be transferred to another person without the new owner incurring penalties and taxes. It’s important, though, to use percentages for the amounts, instead of dollar amounts if you plan on dividing the assets in half. If you said that your ex-spouse is to receive $50,000 and the market flopped, your ex would still get that amount, and you might have nothing left at all.
Divorce isn’t easy, but when there are significant assets involved, including retirement accounts, it’s best to involve a team of legal and financial professionals to make sure your rights and interests are protected.
Source: foxbusiness.com, “How to Split up Retirement Assets in a Divorce” Marilyn Bowden, Sep. 16, 2013