Division of Retirement Plans in a Divorce
Divorces can be messy and contentious. One of the main reasons is due to the assets involved. A divorce entails the split of all marital assets. When you think of marital assets, you may think of money, bank accounts, cars, houses, and other physical possessions such as furniture, artwork, and collections. So one thing you may overlook is a retirement account or retirement plans.
We do not often think about retirement accounts such as IRAs, 401(k)s, and pensions because they are intangible. They are not in our constant presence so we sometimes forget about them. But they are very much subject to split in a Kentucky divorce — and doing so can be complicated.
There are tax and legal consequences to worry about if things go wrong, which is why having a skilled divorce lawyer on your side is key. Whether you are splitting your retirement plan or receiving part of your spouse’s plan in a divorce, you will want to understand the rules that apply.
IRAs vs. Qualified Plans
You need to ensure your retirement plans are put into the correct category or else you could face complications. No matter how you plan to split an IRA, the process is different from a qualified plan, which includes 401(k)s and 403(b)s. IRAs are divided in a process known as “transfer incident to divorce.” Qualified plans, on the other hand, require a qualified domestic relations order (QDRO).
In a transfer incident to divorce, you can transfer or roll over the funds in your IRA without having to pay taxes. The recipient will take legal ownership of the funds and be responsible for the taxes involved in any future transactions. This means that if you transfer the funds from your account to your ex-spouse’s account, you will not owe any taxes. However, if your ex-spouse takes any money out of the account any time after the funds are transferred, then they have to pay taxes.
The trick is to make sure you label the movement as a “transfer incident to divorce.” This means you must list both the division percentage breakdown and the dollar amount of IRA assets transferred. You also need to include the sending and receiving account numbers for all IRA accounts involved. If you fail to do so, you will owe taxes on the transfer as well as an early withdrawal penalty.
When splitting a qualified plan, on the other hand, you will need a legal document called a Qualified Domestic Relations Order (QDRO). It is used to assign an alternate payee to the account. You can then legally split the money among a spouse, ex-spouse, child, or other dependents.
Contact Us Today
Marital assets need to be split in a divorce. This includes retirement plans, which can be complex to divide up.
Velez Law, PLLC can help with complex asset division. We will help you avoid mistakes so you do not have any complications. Fill out the online form or click below link to schedule a consultation.
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