Negotiating the financial and emotional challenges of a divorce can be significant. The tax implications of a divorce are important to consider when dividing assets which are especially true when dividing retirement assets. If retirement account assets are not properly divided during a divorce, and potential tax consequences are not properly considered, it can result in problems later on for the spouses.
Retirement account assets are typically the most valuable liquid asset the couple may have. As a result, it is important that the number one concern related to dividing retirement assets during divorce, which is taxation, is properly addressed. When transferring from one spouse’s IRA to the other’s, it is important that the transfer is performed correctly to avoid penalties or negative tax consequences. IRA divisions must be completed as a transfer incident to divorce and can be completed for up to a year following the divorce settlement agreement.
It is also necessary to meet technical and legal requirements when dividing qualified plans such as 401(k)s, defined benefit plans, and pension plans. Similar to IRA transfers, if the qualified plan transactions are conducted correctly, they are tax-free and can avoid penalties. It is important for divorcing couples to understand the tax implications and consequences of their divorce settlement agreement.
Both spouses should be familiar with the assets and retirement assets of the couple and prioritize what they want out of a property division agreement, making sure to take into account tax implications. The family law process helps to divorce couples work through their financial and property division concerns to arrive at a fair settlement and negotiate the challenges surrounding the division of their retirement accounts.