Most married couples have actively planned for retirement and contributed toward one or more retirement accounts. For divorcing couples, retirement accounts can quickly become a complex matter with significant potential tax implications. Splitting the balances of your checking and savings accounts are fairly straightforward. Retirement accounts in divorce are an entirely different story. By choosing a collaborative process, couples can customize an agreement that works in the best interest of everyone.
Couples can take advantage of the numerous resources available and better plan for the future following divorce. The professionals at Best Legal Choices are here to help. Here are some tips on what you should consider when dealing with retirement accounts in divorce.
Considerations for Your Retirement Accounts in Divorce
Retirement accounts are often one of the largest and most valuable assets accumulated during the marriage. It’s important to understand that dividing retirement accounts in divorce isn’t something that you should do on your own. And it’s important to have a clear understanding of the effects your decisions can have – now and in the future.
It’s important to work with an experienced professional, including a financial neutral, during your collaborative divorce. These professionals can help you better understand the long-term effects and potential tax consequences of your decisions regarding retirement accounts in divorce.
Understanding Your Share of Retirement Accounts in Divorce
The subject of finances during a divorce can be a complicated and emotional matter. During the divorce process, it’s critical to make financially sound decisions to ensure that both spouses will be able to meet their respective financial obligations once the divorce is final.
But how do you calculate and receive your share of a spouse’s retirement accounts – including 401(k)’s, 403(b)’s, IRA’s, Pensions, Profit Sharing, Deferred Compensation, Roth IRA’s, and annuities? It is important to fully understand your options when dividing pensions. What if there were contributions to retirement plans prior to marriage? It is also vital to ensure that retirement benefits won’t be depleted before you receive your share.
In some cases, a Qualified Domestic Relations Order, also known as a QDRO, may be needed. This is an order from the Court that directs a retirement plan administrator to identify, separate and distribute a spouse’s rightful share of marital retirement accounts – per your Divorce Decree. The retirement funds can then be “rolled over” from one spouse to the other in a way that is not considered a “withdrawal,” and therefore does not result in taxes or penalties being paid as part of the division of the accounts. Not all retirement accounts require a QDRO for division.
Dividing annuities can be particularly fraught with potential tax and penalty considerations.
The collaborative process allows divorcing couples to divide marital assets more creatively than in a traditional divorce. You’ll also have access to a number of professionals in a variety of fields. This includes financial neutrals and advisors who can help you make well-informed decisions that are best for you.
Tax Considerations for Retirement Accounts in Divorce
It’s important to note that your share of a spouse’s retirement account, and its distribution, will greatly depend on the type of account. In addition, you’ll need to consider the tax implications associated with each specific account.
If your retirement account is a pre-tax account, like a 401(k), 403(b), or traditional IRA, taxes will be handled differently than they would with after-tax accounts like Roth IRAs and some annuities. Choosing to work with an experienced collaborative attorney and a qualified financial neutral can help you better understand the long-term impacts of splitting certain assets.
If you are utilizing retirement assets to offset other assets, such as equity in the residence, there are tax adjustments that should be made to the amount of the offset.
Contact the professionals at Best Legal Choices to help you work through the important considerations for your retirement accounts in divorce.