Retirement savings in the form of company pensions, 401(k) accounts, or IRAs may be among a couple’s biggest assets. Even if an account is in one partner’s name only, a divorce agreement may specify that the ex-spouse receives a designated portion of the account’s funds. A qualified domestic relations order (QDRO) is typically used to make a former spouse a co-beneficiary of a qualified employer-provided retirement account. Like the plan participant, the partner who receives the retirement benefits is responsible for paying any taxes owed upon withdrawal of the funds. If transfers are made to a child under a QDRO, the participant must pay the taxes due.
No QDRO is needed to transfer all or a portion of the funds from your own IRA to an IRA set up for your ex-partner, but the divorce agreement must contain the proper language specifying that the rollover is intended to be tax-free, or you will be liable to pay taxes, and possibly a penalty, on what is essentially considered to be a premature withdrawal of funds.
Even divorces that are relatively straightforward and amicable can be surprisingly complicated when it comes to paying taxes. If you are preparing to divorce, call us for advice.