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Proper handling can prevent taxation of retirement funds in divorce

A divorce is known to be one of the most emotionally difficult experiences a person can weather. With decisions ranging from child custody and visitation to property division or even the division of business assets and more, a divorce touches virtually every aspect of one’s life. Divorce legal issues can become even more complex when the reality of taxes or other penalties become part of the equation.

A news report recently discussed the complexities surrounding retirement account distributions in a divorce proceeding. If not handled properly, one or both spouses could end up losing valuable assets in many ways. One thing that divorcing spouses should be aware of is the proper timing of when to split up retirement accounts. It must be done only after the divorce decree is finalized. If not, the spouse who originally owned the account will be liable for an early withdrawal penalty if he or she is under the age of 59 and one half years old.

Another key way to avoid being faced with undue loss is to ensure that your divorce decree stipulates any split of a retirement or investment account only in percentages, not in exact dollar amounts. Spouses should remember that account values can fluctuate based upon the market so if each spouse is to receive $25,000 of an account valued at $50,000 on one particular day, problems are at hand if the account value drops before the disbursement is completed.

When faced with any dispute during the end of a marriage, working with an experienced family law attorney may be able to help spouses avoid these and other costly pitfalls. Ensuring fair distributions and preventing unnecessary taxes can be good for both parties.

Source: Fox Business, “How to Split up Retirement Assets in a Divorce,” Marilyn Bowden, September 16, 2013

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