When the difficult decision to pursue a divorce is finally made, the soon-to-be split couple will have a multitude of issues they will likely need resolved, including the payment of alimony and child support, the resolution of any child custody disputes and, of course, the division of marital property.
While this division of marital property will naturally address such items as the home, furniture, automobiles and other tangible goods, it will also address the couple’s finances and investment holdings like pensions, 401(k)s and individual retirement accounts.
Given the value of these latter assets, it’s absolutely imperative that any divorcing spouse undertakes a comprehensive examination — perhaps with the assistance of an accountant — as it will help determine their long-term worth and help ensure an equitable division.
In the event the divorce decree does end up calling for the transfer of retirement assets from one spouse to the other, there are a few issues of which the receiving spouse will want to be aware.
Spouses set to have funds transferred from their former spouse’s IRA account into their own IRA account will likely need to verify from their financial institution what type of information must be outlined in the divorce decree (names, account numbers, etc.) in order to ensure that the transfer can proceed.
Furthermore, those spouses set to receive funds will want to ensure that any transfer of funds into their IRA account does not take place until the divorce is finalized. That’s because if the transfer takes place before this occurs, it could be treated as a taxable distribution subject to a 10 percent penalty.
In general, any division/transfer of assets held in an employer-run retirement plan like a 401(k) must be outlined in a court order known as a Qualified Domestic Relations Order or QDRO.
A QDRO enables the spouse who owns the 401(k) account to transfer funds without incurring the 10 percent early-withdrawal penalty and also prevents the spouse receiving the funds from incurring income tax. However, they must move the funds into another retirement account (i.e., IRA) in order for this to happen.
It goes without saying that the division of retirement accounts and other financial matters can rapidly become a rather complicated issue in a divorce. As such, it can prove to be incredibly beneficial to have an experienced legal professional guide you through these and other divorce-related issues, answering your questions and fighting to protect your rights.
Source: The Wall Street Journal, “If divorcing, divide investments with care,” Lisa Ward, April 6, 2014