Risks to retirement assets in a divorce

Understanding the impact of splitting retirement accounts when getting divorced is important for spouses.

Gainesville residents that get divorced must endure a myriad of losses. If minor children are involved, time with them is often reduced as children must share time between the two parents separately. Homes are frequently sold, belongings are split up and even pets may be given to the other spouse. The potential for financial losses in a divorce also exists and can extend to retirement assets.

Company 401k accounts, pension funds, Individual Retirement Accounts and more are commonly included in a divorce property division settlement. The Georgia Statutes explain that the state follows the laws of equitable distribution. These state that marital assets do not necessarily need to be divided equally between spouses during a divorce. Even though retirement funds are held in one person's name only, they can be marital property and therefore subject to being divided.

QDRO and transfer incident to divorce

Certainly some loss of retirement assets is inherent when the value of an account must be shared with a soon-to-be former spouse. But, aside from that, the biggest threat to these funds comes in the form of taxes. When a divorce settlement requires the splitting of a retirement fund, money is distributed from that account.

For account holders who do not meet retirement distribution criteria such distributions could be subject to early withdrawal fees and taxes. As Bankrate indicates, early withdrawal fees can eat up as much as 10 percent of an account's value.

There are, however, ways to avoid these costs. When a 403b or 401k account must be split, Investopedia notes that the transfer of funds should be done pursuant to a Qualified Domestic Relations Order. For an Individual Retirement Account, the process should include a transfer incident to divorce.

Both of these are legal documentation that proves the account holder is not simply trying to obtain retirement funds early. It clarifies to tax entities and plan administrators that the transfer is part of a divorce agreement.

Other important details

Identifying how plans will be split in terms of which percentage each person will receive is the advisable path. This avoids problems that can happen when market values fluctuate, making the face value on the day that a disbursement is scheduled to occur different than on the day that an agreement was made. Even if the ultimate dollar amount each spouse receives is different, the original intention for splitting remains intact.

Consult with a professional

With much on the line, divorcing spouses in Gainesville are encouraged to seek professional counsel from the beginning of the process. Working with experienced attorneys can make a big difference in the outcome.

Keywords: divorce, retirement, assets, property, accounts