Getting a divorce from your spouse is a stressful procedure. The process involves a lot of issues that drain out the individuals involved. It is mentally, financially and physically stressful. Moreover, the alumni and the assets have to be divided among the two.
If you are going through a divorce and you and your partner have some money in a retirement plan, you will have to jump through a number of legal hoops to split and settle the money in a systematic way. Have a look at the following points as this will help you to go through the process in a systematic way.
How to split the retirement plan after divorce?
During a divorce, the division of money is done based on the financial condition of both the parties. Some couples ask for a fair division with a proper list of who wants what and some couples are awarded property and money based on what the court thinks right. The most sought-after option is to mutually agree on the split, but there are very few chances of the option. When it comes to the retirement plan the court splits the funds depending on the type of plan i.e IRA or a qualified plan.
What are the rules for dividing the retirement plan
IRAs and Qualified retirement plans are divided using different rules. The IRA is divided through a process known as “transfer incident to divorce”, while the qualified plans are divided under the “Qualified Domestic Relations Order” (QDRO). Many courts do not consider the difference in the plan and treat both the IRA and the qualified plans under QDRO. So, in order to avoid any discrepancies, you and your partner should clearly mention the category of your retirement plans in the divorce agreement. Now let’s understand the division of the IRA and the qualified plans under their particular section.
How is an IRA divided?
If you clearly specify that your funds are under an IRA plan, then it would come under the “Transfer Incident to Divorce”, the money will be split and there will be no tax on the separation transactions. Further, the recipient of the money will take up the legal ownership of the money and the assets. It will be responsible for the tax in future and other transactions and distributions related to it. If you do not label the division as an IRA plan, you will end up paying the tax and you will be levied an early withdrawal penalty of the same.
How is a Qualified retirement plan divided?
Qualified retirement plans are divided under QDRO and this section is used in circumstances where the spouse is employed while the other is not employed. Under QDRO a court can direct a company to pay the non- employed ex-spouse the benefit of the retirement plan towards child support or spousal support. This division method can work in the favor of both parties if proper requests are put up in the court on time.
Divorces are a tough process for both individuals and the money matters can further damage the relationship. So, if you are going through a divorce, ensure that at least the financial matter is settled without any disputes.
