Divorces can be a very trying time for couples who are seeking to separate their once-entangled lives. No longer sharing the same residence is usually the least of a once happily married couple’s worries. The division of marital assets, which can include retirement accounts and other savings plans, can be quite costly if not handled correctly during the divorce proceedings. Texas residents can ensure that their financial future is safeguarded from unnecessary tax implications with simple steps that have been put into place early on during the divorce.
Many retirement plans, whether employer implemented or self-started, will become eligible for payouts at the age of retirement, but also become subject to income taxes upon withdrawal. By securing a qualified domestic relations order during divorce proceedings, the ex will receive a designated percentage of the retirement plan, either pursuant to a settlement agreement or awarded by the court after trial. This order, called a QDRO, provides for the division of an employee benefit plan or pension plan under the Employee Retirement Income Security Act of 1974 (ERISA), while maintaining the tax-deferred status for both parties.
Individual Retirement Accounts are also another great savings outlet for retirement. However, during a divorce, things that may seem easy can have costly consequences if not handled properly. Setting up a tax-free transfer to allow one’s ex a fair share of the retirement savings is ideal, but must be done correctly and at the time of the divorce. Doing so without the decree can be expensive in taxes and penalties, as the transfer is then treated as if the owner has received the money prematurely.
The division of marital assets can be painful and, in cases that involve retirement accounts and valuable assets, expensive. However, in certain situations, there can be tax advantages associated with a Texas divorce and property division. The dissolution of a marriage can be challenging, and spouses who are able to find any form of financial silver lining may wish to take any and all means necessary to ease the financial loss that could occur.
Source: marketwatch.com, “Getting Divorced? How to avoid tax pitfalls when splitting up retirement accounts“, Bill Bischoff, Aug. 1, 2017