If you own an IRA or have other retirement assets, a divorce likely will parcel some of it over to your ex-spouse. Even a legal separation can trigger an extension of your retirement income to your spouse before a final decision on whether to divorce is made. A Texas family court will oversee property division when divorce is the final outcome of your marriage.
Two types of asset transfers
The proper division of property during divorce occurs via either a qualified domestic relations order or a transfer incident to divorce. The transfer incident to divorce is the asset transfer that would handle an IRA or similar retirement account. Other commonly used retirement plans, like a 401(k) and a 403(b), are subject to a qualified domestic relations order. As the name of the retirement asset implies, it is a “qualified” retirement plan subject to a court-issued qualified domestic relations order.
Potential tax implications
The partial distribution of retirements assets to settle a divorce might trigger state or federal taxes. It is important to have an IRA distribution done as a transfer incident to divorce to prevent immediate taxation. Once the assets are transferred, the ex-spouse is liable for any future taxation or other fees related to the ex-spouse’s receipt of retirement income over time.
Prevent withdrawal penalties
Another concern with IRA distributions and similar retirement assets is the potential for triggering a withdrawal penalty. If the transfer is handled improperly, the distribution might trigger an early withdrawal penalty, which could be a significant amount. A consultation with a Texas attorney experienced in property division may help you to better understand the various transfer options and how to protect your retirement assets. The attorney may help you identify which assets require proper handling to prevent taxes and penalties.