When two people are married and have jointly owned assets, the divorce proceeding divides those assets. Most understand how that affects jointly owned assets, like a house, vehicles, furnishings and other assets. Those assets also include retirement accounts even if only one spouse is working. Retirement asset division is a particularly troublesome point of contention in many divorce cases.
Two types of assets are subject to retirement asset division. Those are individual retirement accounts (IRAs) and qualified plans. Retirement asset divisions treat the two asset types differently. An IRA gets divided via the “transfer incident to divorce” process while qualified plans, like 401(k) or 403(b) retirement plans, are distributed via a qualified domestic relations order.
When a transfer incident to divorce shifts funds from one spouse’s retirement account to the other’s within a year of the divorce, no taxes apply. The transfer incident to divorce eliminates immediate taxation and helps shore up the finances of both spouses before formally ending a marriage through a court-approved divorce.
A qualified domestic relations order handles the division of other retirement assets by placing them under the control of an administrator. The administrator abides court-ordered levels of asset distributions. A former spouse might receive income right away or have to wait a period to time to access retirement assets depending on how the qualified domestic relations order determines the assets will be shared.
Divorce courts in New York and other states often improperly distribute IRA assets under a qualified domestic relations order. That might trigger additional taxation and other negative impacts. An experienced attorney skilled at retirement asset division could help ensure proper retirement asset divisions.
Source: Forbes, “How To Make Divorce Less Taxing,” Robert W. Wood, June 11, 2010