Distribution of Retirement Assets in Divorce Creates Issues

Many issues need to be resolved in a divorce, including property division between the spouses. Such property may include long-term assets, such as retirement benefits, that involve planning and following procedures to ensure they are handled correctly.

In resolving all of the issues that arise in a divorce couples often tend to put those with a less immediate impact off, such as dividing retirement assets. Among the unique aspects of retirement assets is the issue of taxation. If a retirement account is to be transferred pursuant to a divorce order, it is often not taxable. However, if such a transfer is not completed properly, the distribution of those assets will have negative tax consequences. A method of distributing retirement account assets correctly is through a Qualified Domestic Relations Order, which legally distributes a retirement account between the account holder and their spouse without taxes and penalties that are invoked in a transfer of those assets.

In the event of a divorce, property is distributed between the parties according to the laws in their state. Some states apply community property rules, which define all property between the parties as community or separate property. Community property is then distributed evenly between the parties. The majority of states, including Georgia, apply equitable distribution. Property is still defined as community or separate, but community property is distributed based on what is fair under the circumstances, rather than equally. Assets that are typically considered community property are those acquired during the marriage and not through gift or inheritance. Such property can include bank accounts, vehicles, real estate and retirement accounts.

In the event that a court orders that the retirement assets of one party be distributed between the spouses, many tax implications may arise. The parties may use a Qualified Domestic Relations Order, QDRO, in such an event to bypass these consequences. A QDRO allows funds from a retirement plan to be transferred to the other spouse without tax penalties. A QDRO invokes federal and Georgia law and involves many complicated rules, so a party creating a QDRO should seek the guidance of an experienced divorce attorney to assist them through the process.

Source: FOX Business, "How to Split up Retirement Assets in a Divorce," Marilyn Bowden, Sept. 16, 2013

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