Retirement fund splits and divorce

Learn how to protect valuable retirement assets when getting a divorce. Some taxes and penalties can be avoided if account splits are handled properly.

Whether in Washington, Clackamas or Multnomah Counties, Salem, Oregon area residents who are getting a divorce must face a long list of challenges and losses. Divorce truly can and does affect every aspect of a person's life. When it comes to the property division portion of a divorce settlement, couples should become educated about some basic facts in order to avoid more loss than necessary. This is especially true when retirement accounts are included in the settlement agreement.

Divorce after 50

The National Center for Family and Marriage points out that more people past the age of 50 are getting divorced today than in previous generations. With retirement age closer at hand in the 50s than in the 20s or 30s, concerns about protecting long-term investments increase. There are fewer years left for people to work in order to make up losses from retirement accounts that were split.

The Chicago Tribune recommends that great caution is taken to detail out what a split of a retirement fund truly includes. For example, if a specific account was owned by one spouse prior to the marriage yet is to be shared equally by both spouses, specify whether that includes all contributions that were made or only those made during the course of the marriage. Additionally, people should take this time to update all beneficiary information for these accounts.

All received funds should be reinvested

Forbes described the situation of one spouse in California who received a disbursement from her former husband's 401K account pursuant to their divorce. The woman did not put the money back into a qualifying retirement account and, as a result, was presented with a very large tax bill.

How to prevent unnecessary taxes and penalties

While certainly reinvesting any monies received from retirement accounts is one of the key ways to avoid the assessment of taxes and penalties, there are other things that can be done to guard against this as well.

An article in Investopedia recommends that all transactions involving the payout of funds from a retirement account to a spouse in the divorce settlement be handled with the right legal procedures. For 401K and 403(b) accounts, this means that a
Qualified Domestic Relations Order should be filed. This document, also referred to as the QDRO, offers couples a way to ensure that the IRS and the Oregon Department of Revenue see the transaction as part of a divorce proceeding and not as a sly attempt to obtain funds before retirement.

For IRAs, couples should make sure that their transactions are processed as a transfer incident to divorce. For the spouse that is the original account owner, this protects against any tax liability.

Be protected

With much on the line, couples who get divorced should always seek the help of an experienced attorney. The right professional guidance can make a world of difference to the bottom line.

Keywords: divorce, retirement, assets