Many clients come to me with concerns about dividing their retirement accounts because of the potential tax implications as a result of those transfers. The short answer to this question is that there typically are no tax implications for assets transferred as part of a divorce, including retirement accounts.
Retirement accounts generally come in two flavors – there are those that are self-funded and those that are employee benefit accounts. The employee retirement benefit accounts can also be broken into two categories. The first of those are defined contribution plans such as a 401(k) or a 403(b) account. These types of accounts are ones in which the employee has a pre-tax deduction from their payroll and typically, the employer also provides some matching amount. The second type of employee retirement benefit accounts are defined benefit plans such as a pension or other annuity which pays out monthly upon retirement. Although defined benefit plans are becoming uncommon, they are still out there and available to many clients.
With respect to the self-funded accounts, such as an IRA (Individual Retirement Account), as part of a divorce, these can be transferred to the non-contributing party via a simple rollover from one retirement account to another. Because the transfer is happening between retirement accounts, the transfers are not considered to be a withdrawal and so there is no tax or penalty associated with this type of transfer.
Either of the employee benefit accounts described above can be transferred without tax or penalty implications. However, they require a specific Court Order called a Qualified Domestic Relations Order (QDRO). In this Order, the Plan Administrator is instructed to establish a second account for the non-employee spouse and is further instructed to roll the designed amount of funds into the new account. The right to do this is established under the federal ERISA Act which ensures that these types of transfers can be accomplished without tax implications for either party.
Anyone who is in a divorce process should feel comfortable that the property transfers that include retirement accounts will have no tax implications connected with these transfers.
To schedule a consultation call (425) 822-0283 or visit www.felbecklaw.com. Sakaguchi, Felbeck & Reese, PLLC. is located at 520 Kirkland Way, Suite 400, Kirkland, WA 98033.