Dividing IRAs during divorce requires special attention

On Behalf of | Dec 7, 2017 | Property Division |

People in New Jersey facing the end of their marriages are already dealing with the emotional and psychological fallout of divorce. Of course, another aspect of divorce is also the financial aspect: dividing assets and debts and dealing with the distribution of various types of property. From real estate to retirement savings, all kinds of financial assets and investments are subject to property division during divorce.

In many cases, the most important or largest asset to be divided between the spouses is a retirement plan. For some, this savings takes the form of a defined benefit plan or a 401(k) plan, designated as a Qualified Plan. This means that these can be divided using a Qualified Domestic Relations Order, or QDRO. A QDRO allows these plans to be divided during divorce tax-free and without the 10-percent penalty for early withdrawals usually applied to such plans.

However, Individual Retirement Accounts, or IRAs, are treated differently than these Qualified Plans. Unlike 401(k) plans or defined benefit pensions, there is no requirement that a QDRO be in place to avoid taxes when dividing an IRA during a divorce. However, even having a QDRO does not automatically prevent people from being subject to the 10-percent early withdrawal penalty. However, taxes and withdrawal penalties can be avoided when the transfer to the former spouse is made under a divorce or separation instrument recognized by the Internal Revenue Code and ratified by an appropriate court.

Financial professionals like accountants can be an important part of a divorce support team. A family law attorney can provide not only important advice and representation to protect a divorcing spouse’s interests during property division, but also help them find reliable financial advice for rebuilding after divorce. From asset division to child custody, a family lawyer is critical to ensuring a divorce process protects each person’s rights and meets the requirements of law.



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