How to Manage Retirement Accounts When Getting Divorced in California
If you are seeking a divorce in California, and you are nearing the age of retirement, you may be worried about your retirement accounts. If you are not nearing retirement age and you are seeking a divorce in Orange County, California, you should probably still be a little concerned about your retirement accounts. In many cases, spouses’ pensions and various retirement accounts will be one of the highest-value marital assets. As such, they are one of the assets divorcing parties most wish to protect in a divorce.
In many ways, pensions and other retirement accounts are treated like other types of assets. They are subject to some unique considerations and requirements, as well. As a result, if you are preparing for a divorce in Orange County, California, and you or your significant other hold substantial retirement accounts, you should take care to protect your interests.
Some are tempted to take a distribution from their retirement account to pay for divorce expenses. If this is something you are considering and you are under 59 ½ years old, make sure to consider the tax penalties of early distribution. The penalty could amount to tens or hundreds of thousands of dollars, depending on the distribution. Before taking a distribution, consider other methods of splitting up retirement assets that do not come with similar tax penalties.
1. Transfer Funds to Another Retirement Account: In many situations, it is possible to transfer assets from one retirement account to another. The process has to be done correctly to avoid excessive taxation that would cause the transfer to look a lot like an asset distribution. Successfully avoiding the tax penalties by transferring from one account to another will only work with an IRA (either traditional or Roth). To avoid extra taxes, the transfer also needs to be outlined in the divorce decree. Even if both parties involved have agreed on the terms, you should delay the transfer until the divorce is final, so the decree is in place. But even if you do everything right, this might not be your best option.
2. Using the Qualified Domestic Relations Order (QDRO): Pensions and some other forms of retirement accounts are unique in comparison to different types of community property because they involve a third-party administrator. The plan administrator has a strict duty to distribute pension payments following the terms of the plan or account. To direct payment to a former spouse, you will need to provide your plan administrator with a QDRO, a type of court order. Depending on the type of retirement plan in place, your ex may be required to “join” the plan as a party to the divorce. It can be a complicated process, and it is highly recommended that you work with an experienced attorney.
3. Leaving the Retirement Account Alone: The easiest and safest method of managing retirement during divorce is to leave them alone. During the division of assets, other property of equal value can be assigned solely to your former spouse in exchange for assigning the retirement account in your name alone. For instance, the marital home may be of equal value to a retirement account. The retirement account could go to one spouse while the house goes to the other. Handling the assets in this way would mean both spouses got “half the value” of both assets without having to sell the home or mess with the retirement account. When considering this type of scenario, remember to recognize that some assets are available immediately (funds from the sale of the home, for instance), while others will not be available for immediate use (retirement funds). Consider your situation when handling this type of negotiation.
If you need help protecting your retirement accounts during your Orange County California divorce, please get in touch with the experienced family law attorneys at The Maggio Law Firm today. We are ready to assist you in taking steps to minimize the damage to retirement plans you have spent a lifetime building.
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