During divorce, a couple will probably divide their retirement assets. Sometimes, the Florida court will give all the assets to one party. Either way, both spouses should understand asset division rules during a divorce. The rules change depending on whether the assets are IRAs or qualified plans.
The division process
During the division of a retirement account, separate legal terms apply for each type of retirement. If a couple divides IRAs and qualified plans the same way, separate terms would change the division. IRAs use the transfer incident to divorce to split the funds. Qualified plans, such as 401(k)s, use the qualified domestic relations order, or QDRO. The couple needs to explain to the judge which category each retirement asset is in. Having an incorrect list of assets can further complicate the divorce.
Dividing an IRA
Treating an IRA as a transfer incident during the division of a retirement account allows no taxes on the separation transaction. Depending on the circumstances of the division, an IRA can be a transfer or a rollover. The recipient of the assets will assume full responsibility after the transfer. The recipient would be responsible for the tax consequences of future distributions and transactions.
A couple can divide the IRAs in half instead of giving the entire amount to one party. Each spouse would pay the taxes on early distribution themselves after receiving the funds. The ex-spouse wouldn’t pay taxes on the division if the IRA in a transfer incident. If two parties divide an IRA without a transfer incident, both parties would owe taxes every time a spouse takes money out. The IRS will need to know the exact dollar amount of any nondeductible contributions in an IRA.
After receiving or sending an IRA or qualified plan assets, each spouse should update their beneficiaries. Unless the divorce documents say so, an ex-spouse probably isn’t a beneficiary anymore. Both individuals should update annuities and life insurance after a divorce as well. Creating a revocable living trust may be a good option if children are the primary beneficiaries or one person is remarrying.
Splitting retirement assets is a normal part of a divorce. Tax rules will vary depending on the type of assets and the division method. Dividing retirement assets can be much harder if the judge gets incorrect tax information.