How to split retirement funds in divorces

Couples who live in Georgia can find themselves faced with greater losses than necessary when they do not manage their retirement splits properly.

For the Georgia husbands and wives that are starting the 2015 New Year with the prospect of divorce on the horizon, many concerns can vie for their attention. When minor children are involved, worries about custody, visitation and child support can take center stage. When couples have no children living at home and may be closer to retiring, the bigger worries may be about how to split retirement accounts without compromising their ability to retire.

When the assets in a retirement or pension fund are ordered to be split in a divorce, money is generally disbursed from the account. It is the responsibility of the recipient to reinvest those funds into new accounts that qualify as retirement funds. If this does not happen, the IRS can deem the money to have been taken as an early distribution and therefore assess early withdrawal fees and taxes on the amount.

An example of how this plays out can be seen in a Forbes report of a California woman who did not reinvest money she received from her ex-husband's 401K account per their divorce settlement. Despite attempting to fight the decision, she was left with a substantial back tax bill for her choice to simply keep the received money.

How can the taxes and penalties be avoided?

Certainly the appropriate reinvestment of monies is essential to avoid the unnecessary costs and losses of these precious assets but there are also other things that people can do to help guard against this type of situation.

One of those is the use of a Qualified Domestic Relations Order. Per reports by the Tampa Bay Times and Fox Business, the QDRO is a way of communicating to the IRS that any changes in fund status is the result of a dissolution agreement and not simply an attempt to access money when it is not legally allowable without penalty. Because one of the biggest risks to assets when a retirement account is split is that the distribution is viewed as an early withdrawal, filing a Qualified Domestic Relations Order makes smart sense.

Who is most at risk when splitting retirement accounts?

Anyone with an interest in a retirement account or pension fund that must be split during a divorce can be at risk for additional and unnecessary losses. However, the closer a person is to the age of retirement, the greater the potential damage. This is because there are fewer years left during which to make up any losses sustained.

This worry is greater today than in past decades due to a rise in the number of people 50 years old or beyond who get divorced, as noted by the National Center for Family and Marriage Research data reported by Forbes.

What is the best advice for divorcing couples?

The most prudent step that should be taken during a divorce in Georgia is to secure legal counsel. Getting help to navigate decisions like the splitting of retirement accounts can save valuable dollars down the road.

Keywords: divorce, retirement, assets