When a couple divorces, any retirement accounts they have become part of the whole marital estate that needs to be divided between the two of them. This property division needs to be handled in a certain way or else it can have a great impact on taxes.
If an account is going to be transferred entirely to one spouse, the only thing required is a name change on the account. But when that account is going to be divided, or the entire account is going to the spouse whose name is not currently on the account, it needs to be done properly. Otherwise, it could be considered a full asset distribution and be subject to taxation. Any transfers of funds should go directly into another IRA account to avoid this problem.
Any divorce property division settlement that involves retirement or pension funds should include a qualified domestic relations order (QDRO). A QDRO instructs the institution that oversees the retirement account on how it should be divided. It also ensures that there are no early-withdrawal penalties or taxes that have to be paid on those funds that are transferred.
If these transfers are not done correctly, the recipient could end up paying out almost 50 percent of the amount they receive in the divorce settlement.
Another potential issue is making sure the QDRO is worded correctly. For example, if a $150,000 account is supposed to be divided in half, then it should be stipulated by percentage, not by dollar amount, in the order. If the order states each party receives $75,000 apiece, but over the years the market falls and the balance of the account falls, the ex-spouse would still be entitled to $75,000, not half of what the remaining balance in the account is.
There are many issues that can determine the outcome of a divorce property division settlement and how marital assets should be divided. If you are considering a divorce, contact an experienced Fairfield County high-asset divorce attorney to make sure that your rights are fully protected during divorce negotiations.