The issue of divorce and retirement accounts can be very stressful and confusing. Divorce already raises many emotional and financial issues for spouses, including property division. Community property states like California operate under the assumption that all income and capital gains earned during the marriage are the equal property of both spouses. In particular, retirement accounts may grow by thousands or even millions of dollars during the course of a marriage. Knowing how to handle these accounts might help spouses reach an amicable decision regarding their property division and distribution.
One significant pitfall of a divorce and retirement accounts is taxes. In some situations, a spouse may incur a tax penalty if the transfer is not handled correctly. An article on the subject stated that timing is critical; if a spouse transfers funds before the divorce is final and the original account owner of the plan is younger than 59.5 years old, the owner may be subjected to a 10 percent early withdrawal tax penalty. To avoid problems with taxes and penalties, the IRA transfer should be completed in the manner outlined in the divorce decree or the couple’s property settlement agreement. Transferring assets from one IRA to another IRA could help eliminate potential pitfalls. Additionally, contacting the financial institution that acts as the custodian of the IRA might help provide clarity to ensure that the transfer will not cause taxes or penalties to arise.
Individuals should keep clear records regarding their transfers just in case they are ever challenged in court. They should also update their beneficiary designation for each retirement account with a new beneficiary designation form in order to ensure that their wishes are carried out.
A California family law attorney may be able to help individuals reach an amicable decision regarding some terms of their divorce. The attorney may also be able to provide suggestions regarding fair property division and the distribution of retirement accounts. Seeking an out-of-court settlement may ease the divorce for all parties involved.
Source: Fox Business, “How to Split up Retirement Assets in a Divorce“, Marilyn Bowden, September 16, 2013