• 02
  • July
    2010

Today's post will continue the previous discussion of asset protection strategies and potential tax consequences as they relate to retirement accounts and qualified domestic relations orders (QDROs).

Post continued ...

Do I need to have a QDRO in my final divorce papers? Can't I just transfer the retirement plan proceeds directly to my former spouse?

Failure to have a QDRO as part of your final divorce papers can result in serious tax penalties for you, not your former spouse.

To illustrate, if you transfer any amount of funds from a retirement plan to a former spouse without creating a QDRO beforehand, the IRS will the treat the transaction as if you voluntarily withdrew taxable funds and gave them to your former spouse. Consequently, you will pay the applicable income tax and your former spouse will receive the retirement plan funds tax-free.

In addition, you may have to pay a penalty tax of 10 percent if you are under the age of 59½.

What if I don't have any of the aforementioned retirement plans, just an individual retirement account (IRA)? Do I still need a QDRO to avoid tax consequences?  

No, a QDRO is not needed if you and your former spouse are seeking to divide an IRA. The money can simply be rolled from one IRA into another IRA that was established in your former spouse's name. The only taxes paid will be by your former spouse when they make withdrawals from their own IRA.

However, it is extremely important to know that the process described above can only take place when mandated by your finalized divorce agreement. If you transfer IRA funds before or after the divorce sans this requirement, you (not your former spouse) will have to pay both income taxes on the funds transferred and a penalty tax of 10 percent if you are under the age of 59½.

If you have questions/concerns about asset protection and the division of retirement accounts, you should strongly consider consulting with an experienced and highly skilled attorney.

Related Resources:
  
• Divorce and Your Retirement Accounts (Smart Money)