Avoiding fees when dividing retirement accounts in divorce

On Behalf of | May 19, 2017 | Divorce, Property Division

Certain community assets are difficult than others to accurately divide during a Texas divorce. For many couples, retirement accounts and pensions may seem straightforward. After all, these accounts have a clear balance. It’s easy to determine what was deposited during the course of the marriage, as opposed to what was in the account before the marriage.

You may assume it’s only a matter of making a transfer or agreeing to the amount each spouse will receive, but it’s actually more complicated than that. Even if you both agree on exactly how the accounts will be divided, you need to follow special steps.

When dividing retirement assets, mistakes can be costly

Failing to properly transfer or withdraw the funds could result in significant fees, fines and tax liabilities for both spouses. That’s why it is so important to work with an experienced divorce attorney if the assets to be divided during your divorce include retirement accounts or pensions. Your attorney can guide you through the process, ensuring that the proper forms and terminology get used with each individual retirement account. Your attorney can help reduce potential fees or taxes and can even help expedite the process. Mistakes can cause delays and extra expenses, so get the advice of an experienced attorney.

Different retirement accounts get split differently

There are special laws and tax rules regarding how pensions and retirement accounts can get divided or subject to withdrawal before the owner of the account reaches retirement age. If your retirement funds are in a Roth IRA account, you can not withdraw them without penalty until you are 59 years and six months old without incurring tax penalties. Withdrawals after that age are tax and penalty free. If you and your former spouse need to divide the assets within an IRA account, you must use the process known as “transfer incident to divorce.” Thankfully, these transfers should be tax-free.

If your retirement account is an employer sponsored 401(k), you must split the funds within the account using the “Qualified Domestic Relations Order” (QDRO). If done properly, the QDRO should also be a tax-free transfer. To properly execute a QDRO, you must use certain terms and handle the division with care. If the Internal Revenue Service determines that the division wasn’t handled as a QDRO, there could be tax penalties as there would be for any early withdrawal.

An attorney can simplify the process of dividing retirement funds

Because of the complexity of the process, it is in your best interest to work with an experienced divorce attorney when you need to divide the assets in your retirement accounts. Your attorney can help reduce the potential for taxes and other penalties during this process, while also looking out for your best interests during the divorce proceedings.