Avoiding unnecessary taxes on retirement funds during divorce

Houston couples can learn some of the simple ways that they can prevent loss of retirement assets when getting divorced.

Ask anyone in the Houston area about the financial impact of divorce on their lives and many sad stories can be heard. Loss of equity in homes and lowered household incomes are just two of the realities that people can face after divorce.

Retirement funds are commonly split during property division settlements. This is another area in which people can see their assets diminished. However, some of the losses may be prevented with a few careful steps. The National Center for Family and Marriage Research indicates that the number of people who divorce at 50 or later has grown, making the need to preserve valuable assets an even greater priority.

How to process the transactions

When the value of a single retirement account is divided between the parties, the money is taken from the accounts and disbursed according to the divorce decree. Unfortunately because the money was disbursed prior to retirement it can sometimes trigger a 10% tax penalty by the IRS. To give legal support to these transactions and help guard against taxation, a Qualified Domestic Relations Order (QDRO) should be filed.

After funds are disbursed

Once monies have been disbursed from a retirement account, the next step is to reinvest into new qualifying accounts. Forbes provides an example of what happens when people opt not to reinvest money: a California woman who faced a large tax bill for money she received from her former husband's retirement account because she did not reinvest the funds.

Behold the calendar

Another important aspect to avoid unnecessary taxes and penalties when dividing retirement accounts during a divorce is to ensure that all transactions are processed within the time frames as stipulated by the IRS.

A serious matter

The amount of money that may be lost in the form of early withdrawal penalties and taxes can be hefty and only add to other financial and emotional losses as a result of divorce. Working with an attorney can be the best way to help avoid these situations.

Keywords: divorce, retirement, assets