Asset protection during a divorce

The decision to end a marriage is never an easy one. Whether a couple has been together for two years or twenty, the emotional toll is real. In addition, the losses that can be experienced through splitting time with children as well as property division agreements only add to the trauma of a divorce experience. This can be especially apparent with retirement accounts. Snohomish County couples who may face this reality should understand some of the ways to minimize losses in this process.

Dangers to retirement assets

The biggest dangers to retirement funds or other long-term assets come in the form of penalties and taxes. Typically, a 401K is issued in only one person's name. During a divorce, if this asset is to be split in any way between the parties, the money is generally taken out in a disbursement and distributed from there.

If the disbursement is not managed properly and the spouses do not meet retirement criteria, tax entities can look upon the transaction as an early withdrawal. They then will assess taxes on the funds received by each party. Additionally, accounts can be penalized by the companies for early withdrawals.

How to avoid taxes and penalties

Fortunately, there are a few ways that people can avoid this pitfall during a divorce. None of them are particularly burdensome but they do require careful attention and the right professional guidance.

  • Reinvest appropriately: Money taken from a retirement fund outside of the stated retirement criteria must be reinvested in order to avoid taxes and penalties. A California woman learned this the hard way when she simply kept her disbursed funds but did not claim them on her taxes. She now faces a ruling from the U.S. Tax Court indicating she owes back taxes on the amount she received from her former spouse's retirement account.
  • Use a QDRO: A QDRO is a Qualified Domestic Relations Order. Simply put, it is a document which explicitly tells the IRS and any other pertinent entity that a particular transaction is being processed in accordance with the stipulations of a divorce decree. While not a required document, it is highly advised in all cases.
  • Divide wisely: Whether for a retirement account or a real asset like a home, when stipulating the terms of a division for assets with potentially fluctuating values, the percent, not the dollar amount that each spouse will receive should be the guideline. If an agreement indicates the opposite and the value changes between the date of the agreement and the date of the transaction, someone is likely to lose out.

Taking the time to learn the nuances of the law and working with an experienced attorney can make a big difference in the short and long term for people going through divorce. Nobody wants to see a part of their hard-earned savings lost for no reason.

A person facing a potential divorce should contact a family law attorney to ask about these and other issues. Being prepared ahead of time can go a long way toward guarding against more loss.