Splitting retirement assets in a divorce

Illinois spouses getting a divorce might be wise to consider how they’re going to divide their retirement assets during the divorce process. In lieu of other important divorce issues like child support, alimony and who gets the house, people might tend to put allocation of retirement assets on the backburner. However, financial advisors say that this could be a big mistake.

Retirement assets could end up comprising much wealth in the long-run. Therefore, the manner in which couples divide them could significantly affect their lives later on. However, the biggest issue associated with dividing retirement assets is taxation. If retirement assets are not divided correctly in a divorce, they could end up being subject to taxes and other penalties.

According to some tax professionals, the best way for couples to reallocate assets during a divorce is via a direct transfer from one individual retirement account to another. Such transfers prevent the transferring spouse from incurring tax penalties, and it also protects the receiving spouse from incurring them. Most divorce settlements decree how retirement assets are to be allocated and are not considered taxable since they are part of the property division process.

Another way that people can divide up their retirement assets is through the use of QDROs. Qualified domestic relations orders only apply to retirement assets that are held through workplace accounts, though, such as 401(k)s, 403(b)s and other traditional pension plans. QDROs assign each spouse a percentage of accounts that they are entitled to, which protects spouses in the event that the market falls out.

Divorce attorneys may assist people with working out the details of their divorces. They may help them negotiate the terms of their divorces in a more amicable manner than they would have been able to do so otherwise.

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