One of the most valuable assets couples in Colorado may have are their retirement accounts. Therefore, it is no surprise that these accounts are often fought over should the couple divorce, with each side wanting their fair share. Once an agreement regarding the division of retirement accounts is reached, however, it is important that the right rules are followed with regard to transferring ownership and paying taxes.
Individual retirement accounts are divided through a "transfer incident to divorce." If the divorce decree states the IRA is to be handled as a transfer incident to divorce, with regard to the transaction that separates it, the transaction will not be taxed. Instead the transaction will be considered a rollover or a transfer. Once the spouse keeping the IRA assumes legal ownership over it, they alone will be responsible for any taxes applicable to transactions moving forward. Keep in mind that if the divorce decree does not state the IRA is to be handled as a transfer incident to divorce, the parties will have to pay taxes on it and may also incur a penalty for early withdrawal.
On the other hand, 403(b) and 401(k) plans are divided through a "qualified domestic relations order." QDRO transactions will not be taxed if they have properly been reported to the account custodians and the court. The spouse keeping the account can transfer the assets in the account into their own qualified plan. If the divorce decree fails to include a QDRO, then the transfer of these assets may be taxed and penalized.
In the end, it is important that retirement accounts are handled properly in a divorce so that they are not unduly taxed or penalized. These matters can be quite complex, however, so spouses looking to divide retirement accounts in a high asset divorce may be well-served to have an attorney handle the matter to ensure all legal requirements are satisfied.
Source: Investopedia, "Divorcing? The Right Way to Split Retirement Plans," accessed July 11, 2017
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