A divorce can be one of the most challenging situations to deal with in life, not only on an emotional level, but on a financial one as well. There are countless financial matters that you’ll need to take care of if you’re planning on filing a divorce from your partner. One of the more complicated matters is figuring out how to divide pensions and retirement accounts. With that in mind, the following is a brief guide on how certain retirement plan assets can be divided in a divorce.
With IRS tax-qualified plans, a qualified domestic relations order (QDRO) is needed. A QDRO is a court order that requires the plan administrator to divide the account in two: one for each spouse.
Retirement plan administrators cannot automatically split retirement funds from one participant to pay their former spouse after a divorce has occurred — unless there’s a QDRO in place. However, it’s worth noting that QDROs are only used for plans that are IRS tax-qualified and that are covered by the ERISA (Employee Retirement Income Security Act), such as a 401(k) plan.
One of the things you may be concerned about with regards to dividing up your IRA is the tax implications involved in doing so. If you specify that the division of your IRA should be treated as a transfer incident in your divorce agreement, the transaction won’t be taxed. The IRS will simply classify the division as either a rollover or a transfer.
Once the transfer of assets from one person’s IRA to the ex-spouse is complete, the ex-spouse will assume total responsibility for any tax consequences of future distributions or transactions. Basically, if the ex-spouse decides to withdraw funds out of the account, they will have to pay tax on those distributions – not the person who transferred the assets from their IRA to them. They essentially become the “owner” of those funds and will be responsible for any fees related to early withdrawal.
It’s important to take note that your instructions must satisfy the sending and receiving IRA custodians, not to mention the judge and state laws. If they don’t, you’ll be forced to file an amended tax return – and the amount you send to your ex-spouse will be reported as ordinary income. On top of that, your ex-spouse won’t be able to put those funds into an IRA since it was not considered an eligible transfer, meaning that they will lose the tax deferral benefit.
Filing for divorce is a stressful time for families. It can sometimes feel like your whole world unravels before it’s put back together again. Your attorney is someone who understands the process and all of the intricacies involved in what you will need to do throughout the process. Understanding how your assets will be divided can be stressful without an experienced family law attorney to guide you.
If you’re filing for divorce and looking for an experienced family law attorney who can help guide you through the divorce process with your best interests in mind, contact my office today. Understanding the process and keeping everything organized and on schedule will make things less stressful for you and your family, and the right attorney can make a big difference in the outcome of your divorce. Let’s talk today.