Retirement plans, such as a pension, need special consideration when contemplating a divorce. These plans can reflect the joint efforts of a couple’s collective efforts over a long period of time. People who are in a divorce may be faced with issues regarding the division of such assets and settlements. Another consideration is the division of retirement account funds.
The court must adhere to federal guidelines when dividing retirement account funds in 401(k), 403(b) and other similar types of plans, but state laws dictate how IRAs are divided. It’s critical that your divorce settlement agreement clearly spells out how the assets are split and how those funds will be transferred. If some of the portion of your settlement consists of retirement assets, you should be aware of the tax ramifications and potential penalties involved.
Most of the time, distributions from a retirement plan prior to age 59 1/2 are considered “early distributions” and are subject to a 10% penalty tax as well as ordinary income tax. There is an exception to this rule. It is a transfer to an ex-spouse as part of a divorce settlement. A Qualified Domestic Relations Order (QDRO) is used to affect this transfer. Income taxes still apply, so any assets you receive from a “qualified plan”, such as a 401(k), will be subject to a mandatory 20% tax withholding. This means that, if you are awarded a $100,000 distribution from an ex-spouse’s 401(k) you will actually receive only $80,000.
To avoid this mandatory withholding, the transfer must be made directly to another retirement account, such as your own IRA. Once the assets are in your retirement account, you are now subject to the early distribution rules. If you need some of the assets to live on, or pay bills, make sure you take them out prior to transferring them to an IRA to avoid the 10% penalty.
The reality is that many retirement plans will not pay a lump sum amount and will only pay the non-employee spouse on a monthly basis for life starting at around retirement age, which could be many years in the future. Under these circumstances, the QDRO requesting the immediate lump sum payment would be rejected by the pension plan.
If you have a question regarding Family Law in Southern California please contact us at (818) 926-4420 or visit the Family Law section on our website at Law Offices of Anat Resnik. Call today and we will connect you with Anat Resnik, an experienced, aggressive, affordable Divorce and Family Law Attorney in Southern California. After you have spoken with our Southern California Family Law attorney, we can schedule you a free face to face appointment to discuss your circumstances. If you have questions or are considering any aspect of filing for Divorce, a Paternity issues, Child Custody and Visitation, Spousal Support & Alimony, etc. we can help! Call us now at(818) 926-4420. We look forward to hearing from you and assisting you with any and all family law needs.