Will you have to pay a penalty when dividing retirement savings?

On behalf of Morna Challoner of Challoner Law posted in blog on Tuesday, December 5, 2017.

Financially conscious couples tend to start saving for retirement early on in their marriages. Individual retirement accounts — IRAs — are popular choices when saving for the future, and they provide many benefits to future retirees.

Divorce can complicate these savings though. Most California couples understand that they must divide retirement funds, but many are unsure of how to do so. Failing to consider the implications of improper withdrawals could result in both parties shelling out hefty penalties and/or taxes.

Why can’t we just withdraw the money and split it up?

Savings and checking accounts can be emptied and split much easier than retirement accounts when necessary. You might feel tempted to do the same with your IRA to speed up the asset division process. Unlike IRAs, 401(k)s and other retirement savings, regular banking accounts rarely have associated penalties for withdrawing money.

IRAs, on the other hand, have early withdrawal penalties that tend to be steep, as these intend to discourage people from dipping into their retirement savings. In almost every situation, early withdrawal leads to these penalties.

Is there a way to receive payments from an IRA without facing penalties?

Qualified domestic relation orders allow you to withdraw from your IRA without the typical associated penalties. Divorcing couples create QDROs during asset division, and may then make pursuant withdrawals and payments.

On top of having a QDRO in place, you must pay any withdrawals directly to the intended individual. Paying off a debt on behalf of the other person will usually not qualify for penalty exemptions. This means if you purchase something, pay off a creditor or use the funds for anything other than a direct payment, you will pay penalties and any resulting taxes.

Can I create a QDRO on my own?

Qualified domestic relation orders are complex legal documents that protect your financial interests when making retirement withdrawals. Ensuring the legitimacy of all information and wording on these orders is essential to make sure that you are not penalized for splitting up your retirement savings.

California family law can be complicated, and the rules and regulations surrounding retirement savings may be equally so. A lawyer who understands how these two complex topics intersect can serve as an invaluable guide through this challenging period.

2022-11-23T18:58:59+00:00Categories: Blog, Divorce, High Asset Divorce|Tags: , |

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