Retirement assets generally comprise a sizable portion of California couples’ assets. When it comes time to divorce, how to treat these assets during property division is a serious question. Most people want to avoid taking any penalties or encountering tax consequences for making withdrawals, but are unsure of how to do so. A Qualified Domestic Relations Order is usually the solution.
When dividing a defined contribution plan such as a 401(k), a QDRO is legal order for dividing the savings. The QDRO allows money related to the divorce to be withdrawn before the age of 59.5 without incurring the typical 10% tax penalty. Regular income taxes do still apply to these payments, so divorcing couples should be aware that these payments are not totally tax free.
An IRA plan is somewhat easier to divide than a 401(k). After a family law court determines how much each spouse is entitled to, a person can roll his or her portion into a different retirement account without having to pay any taxes or penalties. Should the recipient decide to use the money in a different way a 10% premature penalty would be assessed.
Other retirement assets can prove even more complicated, such as defined benefit plans, like employer-provided pensions. Courts will also issue a QDRO when dealing with these assets. In some cases, one spouse might be ordered to pay an ex a lump sum settlement for his or her portion of the pension benefits. In others, the ex-spouse will receive this portion of the benefits later during retirement.
However, even seemingly easy-to-divide retirement assets can become complicated during property division. Life is unpredictable and many people incorrectly assess how their various decisions will be affected by taxes. This is why many individuals in California choose to work alongside an attorney who has family law experience rather than trying to tackle everything on their own.