There are so many difficult issues to navigate during your divorce, including retirement accounts. Retirement assets are some of the most contentious items in many divorce settlements due to their significant value. This nest egg may be the largest portion of your marital money.
If you do not properly split these assets, you may deal with various penalties and taxes. It is vital to understand what is at stake when dividing retirement funds in your divorce. But how you divide retirement accounts depends on the nature of the assets.
Traditional and Roth IRAs are relatively simple to separate, but you must still make sure you follow the procedural rules to avoid any penalties. Your divorce decree must spell out the details of the division, including when it occurs and in what amount. The IRA custodian – such as the bank or brokerage company – will need the divorce agreement and give you paperwork to complete. You may also need to create a rollover IRA account for the recipient of the funds. The most important thing to remember is to make a trustee-to-trustee transfer to avoid early-withdrawal penalties and income taxes.
If you are dealing with a pension or 401(k) plan, you need to obtain a court order, known as a qualified domestic relations order. The QDRO is a separate order from your divorce settlement. If you do not split a workplace retirement plan with a QDRO, you will need to pay hefty penalties.
The recipient of the workplace retirement funds should not agree to change the beneficiary on this type of plan before the final divorce decree. Additionally, make sure the QDRO lays out the exact percentage of how much each spouse gets instead of a fixed dollar amount.
Thinking about dividing retirement assets may give you a headache, but it is possible when you have the right help.