A divorce is never a pleasant occurrence. There are so many issues that need to be addressed; not least of those, is the distribution of any retirement assets. Dealing with the division of retirement assets early on can move the process along more smoothly. Here are some things you need to know about splitting up retirement accounts should you or someone you know be facing a divorce.
Qualified Domestic Relations Order (QDRO)
The purpose of this document is to establish what rights an ex-spouse has to a qualified account. Qualified accounts consist of IRAs, 401(k)s, and pensions. It will outline what percentages are to be awarded to each person and address what happens when either person dies.
A QDRO may not be necessary if the only type of retirement account involved is an IRA. These types of accounts can be addressed in the divorce decree or a property settlement agreement and will not be considered taxable.
A QDRO is very instrumental when dealing with tax implications. Transferring assets incorrectly from a retirement account to an ex-spouse’s account means the IRS will treat the transfer as a full distribution. The person transferring the funds will be stuck paying the tax bill on that money. Consultation with legal counsel and a tax professional are advisable to ensure everyone is treated fairly when it comes to paying any taxes that may become due.
This is another detail that should not be overlooked. Updating retirement accounts is crucial to ensuring that an ex-spouse does not receive money that was intended for someone else.
A divorce can be a costly and overwhelming process. It is important for everyone involved to remain focused on the important issues at hand and not let any emotions cloud these important decisions. Divorce attorneys and financial professionals are available that specialize in the division of retirement accounts. Do not leave yourself vulnerable due to a sense of fair play.