There are multiple decisions and negotiations that divorcing couples must grapple with. Many of these decisions are highly emotional, including the allocation of parental responsibilities, ownership of the family home, custody of the family pet, and even possession of sentimental personal items the couple has amassed during their time together. So many of these decisions revolve around the present that it can be easy to overlook the future issues, such as the division of retirement funds and pensions. For this matter especially, having a skilled divorce attorney assisting you can be critical.
There are many factors to consider when trying to determine how these funds will be divided, including tax implications and early withdrawal penalties if the transaction is not handled correctly. Knowing ahead of time the best way to manage each of these accounts can save a great deal of time, stress, and money.
Dividing Different Types of Retirement Accounts
Different retirement plans require different procedures for division in a divorce. Individual retirement accounts (IRA) are savings accounts that offer many tax advantages while enabling people to save for their retirement. These accounts are usually offered by financial institutions, such as banks and credit unions. Qualified plans, such as 401(k) or 403(b) plans, are employer-sponsored plans. Employees can contribute to these accounts and there are no taxes paid on the amount in the account until the employee actually makes a withdrawal.
Transfer Incident to Divorce
When a couple is dividing an IRA, this should be treated as a “transfer incident to divorce.” By processing the withdrawal this way, there will be no tax assessed on the transaction. And, depending on how the final divorce decree is worded, the division could actually be treated as a rollover instead of a withdrawal. If the transfer is not labeled as a transfer incident to divorce, both parties could be responsible for early withdrawal penalty fees. In any case, the transaction should be completed within one year of the divorce decree since any division after one year could trigger an IRS review
Qualified Domestic Relations Order (QDRO)
When couples are dividing assets from a qualified plan like a 401(k), then they are required to file a qualified domestic relations order, referred to as a QDRO. The spouse whose employer offers the qualified plan is referred to as the participant. The other spouse is referred to as the alternate payee. The alternate payee has the option to take these funds and add them to either their own qualified plan or an IRA. Just as with a transfer incident to divorce, transactions involving a QDRO need to be clearly defined or else the parties can again face hefty early withdrawal penalties and fines.
Contact a Wheaton, IL Asset Division Lawyer
If you and your spouse are considering divorce, the division of retirement assets is just one of the many issues you will need to address. An experienced DuPage County divorce attorney at Andrew Cores Family Law Group can help you understand what legal options you may have. Call 630-871-1002 to schedule a free, confidential consultation today.