Retirement Division in a Divorce or Legal Separation
There is a right way and a wrong way in a divorce or legal separation as to how to split retirement accounts.
If you are going through a divorce or legal separation and you or your spouse have money in retirement plans, you will most likely be required to share these assets. In some cases, the assets may be awarded to one party, typically, by agreement or as an offset to some other award of property to the other spouse.
Whether you are giving up funds or receiving them, you need to understand the rules that govern asset division in a divorce. Proper handling is critical to ensuring that the right party is responsible for paying the applicable taxes. The type of retirement plan – that is, whether it is an IRA or qualified plan – determines the rules that apply.
Why is this important?
The type of retirement plan will dictate whether you will need to obtain a Qualified Domestic Relations Order or delineate that funds are being transferred incident to divorce. This matters because, if not done correctly, you will likely owe taxes and early withdrawal penalty fees which can be quite substantial