If you and your spouse invested marital funds into one or more retirement accounts, you’ll need to make designations in your divorce decree to ensure that both parties receive a fair share of these and other marital assets. Depending on your unique circumstances, you may choose to separate your retirement accounts or may elect to divide your total marital property in a manner that allows one spouse to retain all assets contained within the retirement plan. If the two of you do decide to split the account(s), it is important to follow the appropriate procedure(s) to protect yourself from taxation and early withdraw penalties (if you have not reached retirement age). You’ll also want to update your beneficiaries of other financial assets and may choose to create a trust naming your children or whomever you prefer as the beneficiary.
Decide How to Equitably Split Your Marital Estate
With the help of your attorney and/or a mediator (if needed), you and your spouse may be able to decide upon an equitable split of marital property outside of the courtroom. The first step in this process is to determine a value for each individual marital asset, then add them together to create one grand total. In some cases, this is a fairly straightforward process, but certain assets, such as a business and/or those which were owned prior to marriage may warrant expert advice when determining a figure that can be used in the marital estate calculation. Once you have an overall figure to work with, the two of you may choose to split assets in any manner you prefer. Some couples with retirement plans split their accounts down the middle while others choose to award an asset with a value similar to the retirement account(s) (such as the family home) to one party while the other receives the entire retirement package.
Follow the Proper Procedures When Separating Retirement Accounts
Spouses who have decided to separate one or more retirement accounts should use care and follow the proper procedures in order to avoid unnecessary taxation and early withdraw penalties (for those who have not reached retirement age). Individual retirement accounts (IRAs) require a Transfer Incident to Divorce which must be carefully written, recorded in the divorce decree, and approved by the presiding judge as well as any IRA custodians involved. Qualified plans, including 401(k)s, can be divided by creating a Qualified Domestic Relations Order (QDRO) which must also be recorded and approved in the same manner as a Transfer Incident to Divorce. Provided these procedures have been followed, the spouse sending money will not be responsible for any taxes or penalties on funds transferred to the other spouse.
Rolling Funds Into A New Account
Once a Transfer Incident to Divorce or QDRO has been completed, the spouse receiving retirement funds becomes fully responsible for decisions surrounding reinvestment as well as any resulting taxes or penalties. Rollovers from one type of retirement account into a new account of the same type will not incur any fees, but if you plan to move funds you’ve received from a qualified plan into an IRA, you’ll have to pay a conversion tax. Discuss your options with a certified public account (CPA) or another financial professional to determine the best retirement plan in your situation.
Update Your Listed Beneficiaries
If you have your spouse listed as a beneficiary on an asset such as a life insurance policy or an annuity, you’ll probably want to designate another person (or persons) as the new beneficiary on these accounts after a divorce. Many choose to replace their soon-to-be ex-spouse with one or more of their children as the recipient(s) of these growing future funds, but you may choose any person or persons you wish. You may also decide to name a trust as the beneficiary of a life insurance policy or other assets; trusts can be used to distribute your estate in any manner you desire and are excellent retirement planning tools, as discussed below.
Consider Creating One or More Trusts
Trusts are powerful retirement and estate planning tools that can minimize taxes on all or part of the income you’ve set aside for your golden years and/or to assist others. Funds contained within a trust can accumulate interest and often provide your beneficiaries significant tax breaks on disbursements. Many different types of trusts exist, but two of the most common trusts are the revocable and irrevocable trust. Revocable trusts can be altered at any point by the person who created them, provided he or she is still deemed “sound of mind.” Irrevocable trusts, on the other hand, cannot be changed after their creation but can be an excellent option to protect assets and minimize taxes in certain situations. As a result of the complex nature of retirement and estate planning, working with a highly-skilled attorney who understands tax law is likely to save you and the people you love significant amounts of money.
The legal team at the Law Offices of Silky Sahnan can help you ensure your retirement plans remain intact, while tackling the more urgent needs of your California divorce. Call us today at 888-228-1098 for a confidential consultation.