Divorce Planning and your 401k, IRA, and other Retirement Plans
I am getting divorced, but do I need to put additional divorce planning into effect for my 401k, 403b, IRA, or other retirement plan? Divorces are never something that people pIan, however nearly 50% of Americans end up in that situation at some point in their lives.
As a result, I commonly get approached by individuals who are looking for advice on what their upcoming divorce means to their 401k, IRA, or other retirement plan. Divorce planning is tricky anyhow, but when you throw in retirement assets it opens up to a whole new dimension. Here are some pointers that may be helpful when dealing with your retirement savings during this difficult time.
Can my IRA assets be awarded to my ex-spouse in divorce planning proceedings?
Yes. IRA assets can be, and more often than not awarded to an ex-spouse in the course of a divorce settlement. Now a days, this applies both to male and female beneficiaries.
Can IRA assets be awarded as part of a legal separation agreement?
Yes. In addition to being awarded in the typical divorce proceedings, IRA, 401k, and other retirement assets may also be awarded to a spouse in the course of a legal separation.
What happens with IRA assets that are awarded to a former spouse in divorce proceedings?
As the result of divorce proceedings, IRA assets that are awarded to a former spouse in are transferred to an IRA established in the name of the former spouse. This type of direct transfer is often referred to as a "transfer incident to divorce".
Are IRA assets that are transferred to a former spouse typically taxed at the time of transfer?
No, IRA assets as a general rule of thumb are not taxed at the time they are transferred from one spouse's IRA to the IRA of a former spouse provided the transfer is made in accordance with a court-issued divorce decree or separation agreement.
Can I roll the divorce planning settlement into my 401k or 403b plan?
No, as a general rule of thumb, the proceeds from a divorce award can only be rolled into an IRA or other type of fixed annuity, provided that you want to keep the tax deferred status of the funds, and avoid early withdrawal penalties.
Are IRA proceeds received in a divorce settlement exempt from the IRS 10% early withdrawal penalty that typically applies to taxable distributions taken prior to age 59 1/2;?
No, there is no special exception to the 10% early withdrawal penalty for IRA proceeds that are awarded to you as a former spouse in a divorce planning settlement. Once the awarded IRA assets have been transferred to an IRA in your name, you are typically subject to the normal IRA rules governing distributions, taxes and penalties.
Divorce Planning and your retirement
As you can see, your divorce will have a direct result on the status and the amount of your retirement plan. Typically, there is no way around this type of penalty, and there are several potential pitfalls that could affect you in a negative way if they aren’t done correctly. It is best to get the advice of a financial advisor in this settlement procedure, put this chapter of your financial life behind you, and to start planning anew for your future. Additional information about divorce planning can be found in our education center.
