Like many other California residents, as you aged, your priorities changed. For instance, years ago, your primary focus was your children. Now that they are adults with their own lives, your priority probably shifted to retirement.
During your marriage, the two of you focused on building your retirement accounts in order to fulfill your vision of what the future would look like. Unfortunately, that future no longer includes remaining married, and now you face dividing those retirement funds. Now, the goal is to retain as good a position for retirement as possible because you know you probably won’t be able to keep it all.
It’s crucial to get it right
The thing about retirement accounts is that the funds in them are tax-deferred. However, if you take out funds too soon, you pay the price — in extra taxes. These penalties can be significant depending on how much money you take from your account. In a divorce, your spouse could take half of your retirement account, so you can imagine how much the penalties would be. Fortunately, the IRS recognizes that these assets end up divided when couples divorce, so they allow a one-time distribution without penalty.
However, you have to do it right in order to receive this benefit. For employment retirement accounts such as a traditional pension plan or a 401(k), you will need a qualified domestic relations order. This is an order signed by the judge and provided to the administrator of your retirement account. Before presenting an order to the court for signature, you may want to check with your administrator to make sure the order meets with its requirements, which could vary.
If you have more than one workplace retirement account, you will need a QDRO for each one. Neither of you incurs any tax liability for the transfer if the funds go from your retirement account into your future former spouse’s retirement account. If the receiving spouse wants the cash instead, he or she will pay income tax on the amount, but will still not incur a penalty with a QDRO.
It’s crucial to keep as much as you can
More than likely, you want to keep as much of your retirement as possible. While you still need to follow the rules for any distribution if you end up giving your future ex a portion of your account, you do not necessarily have to give up any of it. If you negotiate your own settlement, you may come to an agreement that allows you to keep as much of your retirement funds as possible.
Perhaps the other party would want other assets in exchange for those funds. On the other hand, you may want to give him or her a healthy portion of your retirement accounts in exchange for not paying alimony.
When you use mediation or collaborative divorce to settle these types of property division matters, you can think outside the box and create a settlement that best suits the needs of your family. As long as it doesn’t put you at a significant monetary advantage, the court may approve your agreement.