Retirement assets can be a substantial part of a couple’s financial portfolio. This is especially true for couple’s that have worked a long time in their careers and those nearing retirement age. In many cases, the division of these assets is necessary to effectuate a just and equitable division of the marital assets (as required by RCW 26.09.080). When we address retirement assets with our clients, many are concerned about the tax consequences of such a division. They worry that the division of the retirement asset may be treated as a withdrawal and taxed and/or penalized accordingly. The division of retirement assets may be a bit more complicated than the division of other types of assets (like bank accounts, real property, and personal property), but with an experienced family law attorney there to help you, it need not be overwhelmingly difficult.
In many cases if a 401(k), IRA, or other retirement account needs to be divided a Qualified Domestic Relations Order (QDRO) will be required by the plan administrator. A QDRO is an order, decree, or judgment signed by the court that provides rights to someone other than the plan participant (usually the spouse who was employed by the company) to receive assets from a retirement asset based on their involvement in a family law case. The QDRO should provide details like the amount each party (participant and former spouse) are to receive.
In most cases, a client provides the attorney information on the plan that needs to be divided and the attorney can work with the plan administrator (or in some cases the attorney will already know what the plan administrator requires) to draft a QDRO that complies with the plans requirements for division or the account at the time of dissolution of marriage. In many cases a family law attorney will ask the account administrator to preapprove the QDRO before having it signed by the court. This can eliminate the chance that the attorney has drafted and had the court sign a QDRO that cannot effectively divide the retirement account.
The Internal Revenue Service (IRS) has a website that provides information on the tax implication of dividing a retirement account. For the most part, if the account is divided, but not withdrawn, it will not be a taxable event. In some cases it is necessary for the spouse obtaining the portion of the other spouse’s retirement assets to withdraw some or all of the funds to be able to make ends meet. In those cases, a family law attorney will advise you on how these tax consequences should be dealt with in your dissolution case. It may be necessary to also have your tax professional assist you in this transaction.
If a person is getting divorced, they should also consider whether they are going to want to change the beneficiary on their retirement account should they die before it is depleted. Many people have their spouse listed as beneficiary prior to dissolution, and will need to choose a new beneficiary after the dissolution is finalized.
If you have questions about the division of retirement assets or any other asset during a family law case, please contact us today. We have a Seattle area family law attorney ready to answer your questions.