If you are considering filing for divorce after being married for many years, the process will impact your retirement, social security benefits, and pension plans. For a lot of older couples, these plans and benefits are significant parts of their net worth. Thus, your divorce must address the division of retirement assets carefully and thoughtfully.
As with other property, your retirement accounts will be split up in divorce. However, tax and legal implications make this more complicated than just splitting funds down the middle. You must consider many things. This is the reason you must go through the divorce process with a salt lake city divorce lawyer on your side.
Retirement Account Assets vs Cash
Assets and cash in retirement accounts are valued differently due to the different applicable tax treatments.
For instance, what you have in a traditional IRA will not be worth as much as what you have in a checking account since the money you will withdraw may be taxed.
It is important that your lawyer understands your financial goals and has familiarity with the possible income tax ramifications, which include extra taxes on early withdrawal, related to every kind of account you may split up in during divorce. All of this will influence the way you negotiate property division.
Retirement accounts such as 401 (k) and pensions are divided through a qualified domestic relations order or QDRO. When you split up assets, the spouse who gets the assets may take what they receive as a distribution or roll it over into their retirement plan account. The distribution is not subject to the additional tax on early withdrawal, although the spouse still owes state or federal income taxes on the distribution. This depends on when the receiving spouse uses the money.
IRAs are split under a transfer incident to divorce. Although money leaves the account, the owner of the account does not owe income taxes since a divorce settlement covers it. But, when the receiving spouse takes a distribution of the funds instead of rolling them over, they may owe both federal or state income taxes, along with extra taxes for withdrawing the funds early.
Following the division of different retirement accounts and finalization of a divorce, couples must revisit and revise their beneficiary designations on the retirement accounts they still own. Otherwise, they may leave their ex-spouse still their beneficiary after the divorce.