When divorce involves the division of qualified assets like an IRA, annuity or 401(k), spouses must consider tax implications.
Kiplinger explains tax consequences that may influence how couples split qualified assets.
Distributing IRA funds may trigger a penalty
An IRA may be marital property if one spouse opened the account during marriage or made contributions with joint funds while married. Marital assets are subject to division in a divorce decree, but you should not rush to distribute an IRA.
Distributions made before someone turns 59 ½ years old may be subject to a 10% penalty plus taxes. You may minimize penalties and taxes by transferring assets between IRAs.
Selling an annuity may generate a tax bill
One option for dealing with an annuity in divorce is to sell or surrender the annuity and distribute proceeds. This route may result in taxes, surrender fees or reduced benefits.
Couples may find more favorable tax treatment if they withdraw from an existing annuity contract and enter into one or two new contracts. The IRS treats transfers like this as non-taxable events although distributions remain taxable.
Dividing a 401(k) requires compliance with plan rules
You and your spouse have a claim to all or part of the other’s 401(k), but the plan’s rules may limit your ability to divide this account.
Subject to factors like age and employment, you may have the option to roll a 401(k) into an IRA to avoid taxes and penalties. Another possibility is for one spouse to keep the 401(k) while the other spouse retains assets with a comparable value. This alternative requires you to assess tax implications and growth potential of assets. Penalties, taxes and legal hurdles make liquidating a 401(k) an option of last resort.
Under Georgia law, property division must be fair and equitable but not necessarily equal. You may need a qualified domestic relations order to divide some retirement accounts.