Learn how to split retirement accounts during divorce

Anyone who has experienced or is facing a divorce knows the range of challenges associated with this difficult situation. From the emotional to the financial, the losses and decisions that must be made can impact every part of one's life. For today's couples, retirement accounts are frequently part of a property division in divorce cases. These funds require special handling when being split in order to avoid paying high penalties or taxes which could wash away a large part of the assets.

Concerns about how to split retirement funds during a divorce are shared by persons of any age but can be especially concerning to those who are near or at retirement age because they will have less time to make up any losses that may occur. Information released by the National Center for Family and Marriage Research confirms that the number of U.S. divorces among those over the age of 50 has grown in the last few decades, as reported by Forbes. This makes learning how to properly split retirement accounts in a divorce highly important.

Why retirement account funds would be subject to taxes and penalties

When retirement funds are withdrawn or accessed by persons who meet age and other qualifications, no additional penalties or taxes are assessed. However, when those funds are received by someone below the age of retirement early withdrawal penalties and taxes must typically be paid.

Retirement funds that are dispersed pursuant to divorce decrees may fall into this category unless the proper steps are taken. Following are the ways that people can avoid these situations:

  • Reinvesting

    When monies received from one retirement account are put into another qualifying account, no penalties or taxes are assessed. A Forbes article recounts the story of one California woman who did not do this and, as a result, now owes back taxes on the funds that she chose to keep.

  • Using a QDRO

    A Qualified Domestic Relations Order is essentially a means by which courts and tax agencies are formally notified that financial transactions are part of divorce settlements. Using a QDRO can ensure that penalties and taxes are not inappropriately levied.

  • Timing

    Many actions involving transferring retirement account money are time sensitive. Family law attorneys can help clients be aware of timing issues and help ensure that each client receives the total value of the retirement account that they are entitled to and avoid the need to pay additional fees.

Get help from the beginning

Because divorces are so complex, getting help from a lawyer from the outset is important. Having an experienced professional provide assistance can prevent many unpleasant outcomes in an otherwise difficult time.