Minimizing loss of retirement funds in a divorce
Couples who live in San Antonio, Texas that get divorced should learn how to avoid losing unnecessary portions of their retirement assets.
When a couple in San Antonio makes the difficult choice to part ways, the emotional angst alone can be devastating. To make matters worse, many serious financial issues can also arise when spouses end a marriage. Decisions such as whether to keep a family home or sell it and who will receive what assets create complicated situations that can drag the process out.
One issue that is of great concern to many couples, especially those who may be approaching retirement, is how to best split retirement account savings. People who divorce in their 50s or early 60s have far fewer years left to work and earn additional retirement funds pushing this issue higher up the list than for people in their 20s or even 30s. The National Center for Family and Marriage Research data confirms a growing number of divorces happen to marriages with couples that are 50 years of age or older, highlighting the validity of this concern for many people.
What happens to retirement funds in a divorce?
One of two things often happens to retirement funds when a couple gets a divorce. A single fund can be retained by the named account holder and then the other spouse receives different assets. In many situations, however, the choice is made to split the value of the fund between both parties. When this happens, the stipulated amount of money is essentially removed from the account and transferred to the receiving spouse.
It is at this point that the risk of greater loss enters the scene. Certainly receiving only part of the value of a retirement fund is already some level of loss. However, if the transaction is not processed properly, the money can be subject to early withdrawal penalties and taxes that then dramatically reduce the amount received by each spouse in the end.
Can the penalties and taxes be avoided?
There are some procedural steps that can be taken to avoid paying the early withdrawal penalties and associated taxes on retirement account assets split during a divorce. One of these, as noted by Forbes, is to ensure that any monies received are put into another qualifying retirement fund. This prevents the taxes and penalties by maintaining the assets for retirement purposes. One woman in California who did not take this step found herself with a large income tax bill as a result.
The Tampa Bay Times and Fox Business both recommend filing a Qualified Domestic Relations Order when a divorce settlement orders the split of a retirement account. This document clarifies to tax agencies that the funds transfer is a part of the divorce decree rather than simply a cashing out of the account.
Recommendations for divorcing spouses
There can be many small details during a divorce process that can make situations better or worse in the end. For this reason, it is always recommended that spouses work with experienced attorneys who know these things when getting divorced as one way of minimizing their losses.
Keywords: divorce, retirement, finances