Be sure to take this step before dividing a retirement account

Be sure to take this step before dividing a retirement account

| Apr 20, 2020 | Property Division |

Many Kentucky couples make a plan to set aside money for “the golden years.” They put as much as they can into their employment retirement plans knowing that it helps them not touch it until they reach an age where they can take distributions without penalty. If the marriage ends, they then face dividing a retirement account, but if they fail to do it right, it could be a costly endeavor.

Property transfers as part of a divorce may not always incur tax liability, but it rarely happens without taking extra steps. For instance, when dividing retirement accounts that fall under ERISA, the parties risk incurring the early withdrawal tax penalty, which is typically 10% of the amount withdrawn. The penalty could be avoided, but it requires a qualified domestic relations order.

A QDRO is an order from the court directing that the transfer of funds from a retirement account qualifies under all applicable laws in order to avoid the tax ramifications since only certain people may receive the funds from such a transfer, including an ex-spouse. Many plan administrators have an internal form to accomplish this, but it may not be enough to make sure everything goes smoothly, especially considering that these orders must include specific information to remain valid.

No one wants to make costly mistakes during a Kentucky divorce, but when it comes to dividing a retirement account, a mistake could be financially devastating. It is bad enough that many people in this situation are set back years in saving for their retirement by dividing this asset. Instead of leaving anything to chance, it would be wise to consult with an experienced family law attorney who can help ensure that the QDRO submitted to the court for approval ticks all the appropriate boxes and applies to all applicable laws.