If you get divorced in the state of Indiana, there is a chance that you’ll be required to cede a portion of your retirement accounts to your spouse. In the event that a settlement requires you to take such a step, it’s important to do so properly. Otherwise, you could trigger a taxable event, which could further reduce the value of your IRA, 401(k) or 403(b).
You may need to draft extra documents to split an account correctly
A qualified account such as a 401(k) will need to be divided per the terms of a qualified domestic relations order (QDRO). The QDRO tells the plan administrator that a withdrawal is occurring pursuant to a divorce, and it also provides details about the withdrawal such as how much is being taken out, when it will occur and where the money is going. This document needs to be drafted in addition to the divorce decree authorizing the division of a qualified retirement account.
What happens if you divide an account prior to obtaining a divorce decree?
Taking money out of a retirement account before your divorce becomes official means that you will likely owe income tax on the amount withdrawn. Furthermore, you’ll likely be subject to a 10% early withdrawal penalty if you are under the age of 59 1/2. A family law attorney may be able to talk more about the potential tax consequences of this type of action.
When done properly, it may be possible to divide a retirement account without triggering any type of taxable event. This is generally true if the money is immediately transferred into a new IRA or 401(k) in the recipient’s name.