Retirement accounts are often assets to be divided between parties in divorce. Parties can avoid paying taxes on the division if they know how to properly describe their accounts in their divorce decree. An improper label can result in paying taxes, and the burden becomes even greater when accounts have a lot of money. Parties can avoid paying taxes using a QDRO or TID methods for retirement asset division.
Qualified Domestic Relations Orders, or QDRO, is the method used to divide non-IRA accounts, such as 403(b)s and qualified plans like 401(k)s. As such, these accounts must be properly labeled using the QDRO method of transferring assets to avoid taxation. The receiving spouse then may roll a qualified plan into an IRA, but this portion is subject to taxation.
Transfer Incident to Divorce, or TID, is the method used to divide traditional and Roth IRA accounts. The IRS has several requirements for the transferor of money to meet to avoid paying taxes. The divorce decree should identify the transaction to the receiving spouse as a “transfer” or “rollover.” The label is dependent upon spouses’ circumstances. Both parties can avoid paying an early tax penalty by describing the division percentage breakdown and the specific dollar amount to be transferred and listing all account numbers.
Details included in the divorce decree must satisfy the California State laws, sending and receiving IRA representatives, and the presiding judge. If the court approves the division, the receiving party becomes solely responsible for the IRA’s future tax consequences. Parties who do not receive court approval can suffer even greater consequences with the IRS. Because of this, parties often hire financial experts and experienced estate planning to provide assurance that the division is completed effectively.
Once retirement accounts have been divided, it is important to ensure that beneficiaries are updated if necessary. You want your retirement account to go to the person that you choose. It is your responsibility to follow the procedures outlined in specific account’s agreement.
Property division is one of the more stressful and important parts of the divorce process. Missed and important details can result in undesired consequences. Additional issues such as child custody and support can also require the support of a strong legal team.