Splitting Up Retirement Accounts When You’re Splitting Up

9:15 pm Asset Protection, Retirement Planning, Tax Planning

divorce split couple 150x150 Splitting Up Retirement Accounts When You’re Splitting UpCouples in the process of divorce usually want to get all the legal wrangling behind them as soon as possible, when if significant retirement savings are involved, then it pays to pay careful attention to splitting those assets without incurring unnecessary taxes.

Financial experts advise divorcing couples to consider the following when divvying up retirement accounts:

IRA transfers – usually, an IRA transfer is a part of many a divorce settlement, but funds must be transferred in the right way to avoid taxation.  A preferred method is a direct transfer of assets from one IRA to another, but these transfers must be specifically required in the divorce decree, separate maintenance or written agreement incident to a divorce or they will be considered a taxable transfer.  Verify the correct procedure with the financial institution that is custodian of the IRA and make sure the transfer occurs after the divorce is final.  If it is done prior and the original owner of the IRA is under the age of 59 ½, he or she would face the 10% early withdrawal penalty.

QDRO – a qualified domestic relations order (QDRO) can also be used to divide assets without incurring taxes or penalties.  These are traditionally used for dividing 401(k)s and pension plans.  Use percentages instead of dollar figures when specifying the split in a QDRO so one party will not suffer if the assets depreciate.

Beneficiary designations – many an ex-spouse has gotten a financial windfall because his or her ex forgot to change their beneficiary designations.  While many states have laws that terminate an ex-spouse as beneficiary on retirement plans or IRAs that pass via beneficiary designation, a recent U.S. Supreme Court ruling clarified that state laws do not govern federal benefit programs.

For more information on California asset protection, contact our Orange County law firm.

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