Divorce settlements are complex and often include details relating from child support to complex property division and many things in between. Michigan couples can be overwhelmed by the immediate needs of identifying child custody and division of tangible marital assets can find it difficult to focus on longer-term topics such as retirement accounts but the importance of identifying a property division plan for all assets, whether tangible or intangible, at the time of the divorce cannot be stressed enough.
Because changes to investments like retirement accounts can have tax implications, ensuring that any amendments are handled through the divorce process is the best way to prevent unnecessary taxes and penalties, which essentially can erode away a portion of the investment. Often, a Qualified Domestic Relations Order can be developed that carefully outlines the plan for any such assets. Proper timing of distributions in the divorce process is also important. For example, if you process a distribution before the divorce is complete from an account-owning spouse who is 59-1/2 years old or less, the distribution is subject to a penalty amounting to a 10 percent early withdrawal fee.
Details of distributions should be defined in percentages not dollars. This is because dollar amounts can fluctuate in terms of what percent of an account they are frequently but the percent will always be the percent. If dollar amounts are stated and a resulting change in account value occurs, the former spouser will still receive their stated amount but the account holder may get nothing.
Working with a divorce attorney with experience in division of assets in a divorce as well as knowledge of such tax laws can be a very helpful way to avoid more loss and complications during or after a divorce.
Source: Fox Business, “How to Split up Retirement Assets in a Divorce,” Marilyn Bowden, September 16, 2013