Who wants to pay the penalty on your retirement award after divorce? Beware of hidden taxes on retirement!
Getting divorced is a significant financial transaction that can have serious tax implications, especially if you have retirement accounts. When funds are taken out of a spouse’s account to be transferred to the other spouse, the money must be placed in that spouse’s retirement account to avoid immediate taxation. If this is not completed within a specified time, the funds may be taxed as ordinary income. To avoid paying taxes on retirement transferred under a divorce settlement:
- Plan to make sure you understand the tax consequences and establish qualified retirement accounts if the receiving spouse does not have one.
- Find out if you need a QDRO to divide the retirement plan accounts and decide who will pay the costs of drafting and entering the order, and expenses charged by the Plan administrator for segregating the accounts.
- Understand that IRA’s do not need a separate order (QDRO), but the receiving spouse still requires a different IRA account in their name for a tax-free transfer of money.