Caution Urged When Splitting Retirement Funds In A Divorce

Divorcing couples must follow clear guidelines when dividing retirement assets, or face penalties. Funds should be split in terms of percentages.

Orange County couples who are working through a divorce must address many issues. The emotional nature of determining child custody and support, spousal support and the division of marital property and assets can take a toll on people.

Sometimes, especially when proper professional guidance is not utilized, some decisions may not be made in the best way and this can lead to serious results, including financial losses. Dividing retirement accounts during a divorce is one such thing that requires great care in order to avoid paying undue taxes or early withdrawal penalties.

The When Matters

The laws are extremely limited and clear when it comes to identifying the appropriate window in which funds from retirement accounts can be transferred as part of a divorce proceeding. If you process any distribution or transfer outside of the stated timeline, you will lose a good portion of your retirement dollars to penalties and taxes. Make sure that you obtain the right counsel to ensure your transfers are done only when you are able to avoid such consequences.

The How Matters

Some financial transactions that occur as part of a divorce require the use and filing of a Qualified Domestic Relations Order. This order, however, can also be utilized for any such transaction, even when not required. The benefit of doing so is to ensure beyond a shadow of a doubt that the IRS understands that the transfer is part of a divorce. This prevents the assessment of taxes or other penalties.

Use Percentages, Not Dollars

Your divorce agreement should stipulate the division of retirement accounts in terms of the percent of ownership that each spouse is to receive. This is in contrast to identifying specific dollar figures. The reason is to protect your assets and ensure a fair division regardless of market value.

Assume for a moment that you have a retirement fund account and its current market value is $250,000. You and your partner agree to each take $125,000. Next, imagine that it is now six months later and time for the transfer of funds to happen but market conditions have worsened and the value of the account is only $200,000. Depending on specific circumstances, one person may still receive their promised $125,000 while the other is left with only $75,000.

If you originally stated that the fund was to be split equally, such variation would not occur. The method of identifying ownership in percentages instead of dollars can also be applied to any other asset that has a potentially changing value.

Professional Counsel Is Important

Protecting your future income source is vitally important. One way to help do this is to ensure that you work with a very experienced attorney during your divorce. Having the right guidance can help you avoid unwarranted pitfalls and loss of asset value.