Dividing retirement fund assets during a divorce is all about who’s going to be paying the taxes.
“Whether you are giving up funds or receiving them, you need to understand the rules that govern asset division in a divorce,” Mark Cussen cautions in Investopedia. There are rules, and whether the plan is an IRA or some other type of retirement plan will determine which of those rules will apply. The reason it’s so important to determine proper handling is to ensure that the right party is responsible for paying the taxes.
Vocabulary is important here, too, because IRAs are divided using a process known as “transfer incident to divorce,” while 403(b) and 401(k)s are split under a Qualified Domestic Relations Order or QDRO. QDROs and transfers incident to divorce are tax-free transactions as long as they have been reported correctly to the courts and the IRA custodians.
The rise of so-called “gray divorces” (older people getting a divorce) has created certain issues, Cussen explains, because those older people may have already begun to take regular distributions out of their retirement accounts. The biggest issues have to do with so-called Section 72(t) distributions. What are 72(t)s? When people begin taking distributions out of their IRA accounts before age 59 ½, they would normally be paying a 10% penalty. The 72(t) rule allows distributions to start even earlier as long as the regular withdrawals continue for the longer of five years or until the IRA owner turns 59 ½. Dividing up an IRA account that has a 72(t) system going on (with the IRA owner still under 59 ½) – well, that has the potential to create tax and bookkeeping problems, to say the least.
At Rebecca W. Geyer and Associates, we hope for the best and at the same time try to anticipate problems before they happen. If a couple is planning to marry and this is a second marriage, we often help prepare a prenuptial agreement, in order to
- protect children’s inheritance
- protect retirement assets
As people age, they naturally have more assets to protect, and if clients have decided to dissolve their marriage, we work together with their CPAs to minimize taxes and help both parties plan for the future.
– by Cara M. Chittenden, Associate Attorney with Rebecca W. Geyer & Associates