Loss of equity in homes and lowered household incomes are two of the realities that people can face after divorce. Loss of retirement assets is another important possibility that should be discussed with your attorney.
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. Retirement funds are commonly split during property division settlements. However, some losses may be prevented with a few careful steps.
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, if the money is disbursed prior to retirement it can sometimes trigger a tax penalty by the IRS. To give legal support to these transactions and help guard against unnecessary 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. When people opt not to reinvest retirement funds that come from a spouse’s account, it can trigger a large tax bill, even if the other spouse reinvested his or her portion of the disbursement.
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.