While wedding vows may say “until death do us part” it doesn’t always turn out that way, with the statistics for divorce in the United States sitting between 40%-50%.
Nobody plans for divorce, but the reality of this statistic means it could happen. If you are divorced or in the midst of divorcing and negotiating the myriad of issues that come with separating lives, you understand the complexities of disentangling assets.
When divorcing, a couple’s financial assets will be split in some manner between the two. Whether it is a 50/50 split or a skewed percentage, mistakes can easily be made when splitting up a retirement account.
Individual retirement accounts (IRAs) may be divided by a regular court order or judgment.
It’s important to be aware of the tax consequences and potential delays involved in the transfer of IRA funds when negotiating the divorce settlement.
- The IRA transfer is provided for in your divorce decree or property settlement agreement, AND
- The funds are transferred directly from one spouse’s IRA to the other spouse’s IRA
Use Specific Language
When dividing up or separating retirement accounts, it is essential to use specific language detailing what will happen in the marital settlement agreement. In addition to being clear with the language, you also need to ensure that the documents are submitted with the correct legal terms.
IRAs are divided using a process known as “transfer incident to divorce,” while other qualified plans are split under the “Qualified Domestic Relations Order” (QDRO). Mixing up the terms upon submission can lead to confusing complications.
Once everything is settled, it is inadvisable to simply withdraw the money from the retirement account to access funds as this will be treated by the IRS as a withdrawal that will incur taxes.
If, when splitting the accounts, you are receiving a distribution according to a QDRO, you should evaluate if you will want to use those funds before age 59 ½. If so, you can use funds received directly from a QDRO plan while being exempt from the 10% penalty.
However, if you decide to roll those funds over to an IRA and then decide that you want to use them before age 59 ½, you will have to pay the early distribution penalty.
Reassess and Update
Going through a divorce is not easy, no matter how amicably it goes. Your life has changed forever, and that likely includes your finances. After the divorce is finalized, it is recommended to re-evaluate your current financial situation with a financial specialist.
This article originally appeared on TheStreet.com.