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Retirement plans can be split during divorce without tax issues

On Behalf of | Sep 21, 2017 | Divorce

During the process of getting divorced in Alabama, a topic that is often not considered is taxes. After all, dealing with issues such as the division of assets or spousal support can naturally be complex without even addressing the tax aspects of them. Fortunately, couples who are splitting retirement account or pension funds during divorce do not have to worry about the tax consequences of doing this.

According to the Retirement Equity Act, courts can award an employee spouse’s pension to the other nonemployee spouse without it resulting in a tax penalty. This is true whether just a part of the pension or the whole pension is being awarded to the nonemployee spouse. In fact, any retirement account may be divided during divorce without having tax consequences.

In light of this, spouses who are getting divorced do not have to take distributions from their retirement plans just to transfer all of their accounts or parts of their accounts to the other party. A state court simply has to issue a legal order known as a qualified domestic relations order, or QDRO, which is served upon the administrator of the retirement plan to be split. Then, the plan will be split in part or in whole, with the appropriate funds going to the nonemployee spouse once the employee is eligible to get payments.

When it comes to splitting retirement funds, a couple may find it easiest to complete informal negotiations to reach a resolution that is mutually beneficial and satisfactory. This can be a lot less stressful than going to trial, where a judge will have to decide for the couple how their retirement funds will be split. An attorney in Alabama can provide guidance to ensure that one’s rights and best interests are upheld during each stage of the divorce proceeding.

Source:, “Taxes And Family Law: A Cheat Sheet Of What You Need To Know“, Stephen Hicks, Sept. 8, 2017

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