Prevent Penalties When Splitting Retirement Funds in a Divorce

Oceanside couples that must go through divorces have a myriad of issues to contend with. Some of these issues will vary based upon the ages of the spouses, whether or not any minor children are involved and more. For people that are in their 50s, 60s or even older, protecting retirement assets can become one of the most critical issues during divorces.

This is becoming more and more common in the United States with the number of people aged 50 and beyond that have been divorced doubling between 1990 and 2010, according to the National Center for Family and Marriage Research and reported in Forbes.

California woman receives big tax bill for retirement disbursement after divorce

Forbes also ran a story that highlighted not just the growing prevalence of divorce after 50 but also of the risks that can come with the splitting of retirement accounts during a property division settlement.

A woman in California was awarded a portion of her husband's 401K as part of their divorce. A Qualified Domestic Relations Order was utilized in order to assure that the IRS and the Franchise Tax Board knew that the disbursement was pursuant to the divorce decree. The QDRO would have protected the woman from paying taxes on the money-as long as she reinvested it.

Instead of reinvesting, however, the woman simply retained the money. After a bid to avoid paying taxes, a United States Tax Court handed down the final decision indicating that the woman did owe back taxes on the funds.

Future asset protection in the face of divorce

Understanding the requirements of divided retirement accounts can make a big difference to the amount of funds spouses will retain after a divorce. As Fox Business as well as the Tampa Bay Times have noted in separate articles, using the QDRO is one way to help avoid taxes or penalties but only when other parameters, such as reinvesting, are also followed.

Other options for retirement funding

Standard 401K or other similar accounts should not be the only assets that divorcing spouses consider obtaining. According to Forbes, since Roth accounts are funded by dollars already taxed, receiving these assets may make better financial sense. Additionally, some people may be able to obtain social security from their former spouses' benefits.

Consult an attorney for professional advice

Because of the importance associated with preserving the financial future after a divorce during the retirement years, working with an attorney during divorce settlements is advised. The right experience can make a big difference in the end.