One of the Founding Fathers of our country once said that two things are certain: death and taxes. Every California adult will have had dealings with the IRS at one time or another and will be familiar with how complex tax issues can be. When it comes to divorce, unfortunately, they are no less so.
The division of retirement accounts, in particular, can have serious tax implications if done without care. With so many different types of funding available, it is impossible to use one method to deal with all of them. The consequences of carelessness in this area could be catastrophic. One of the worst-case scenarios may be that one could potentially find himself or herself in a higher income bracket, left with the entire tax bill, and subject to a number of different penalties – while the ex-spouse gets all the benefit.
There are ways to reduce the financial impact of dividing retirement funds. For example, using a qualified domestic relations order can establish the legal right of the ex-spouse to an agreed percentage or amount of one’s work-related retirement fund. This has the advantage of protecting individuals from having to bear the brunt of tax costs that should be shouldered by the party receiving the funds. It can also allow the ex-spouse the opportunity to defer payment of taxes not due until a later date.
While many California residents can deal with the essential details of how to divide retirement plans fairly as part of their divorce, the consequent tax bills may require additional advice. Dealing properly with these things at an early stage, one will be able to avoid unpleasant surprises further down the line. This will help both parties to move forward in a positive manner.
Source: marketwatch.com, “Getting Divorced? How to avoid tax pitfalls when splitting up retirement accounts“, Bill Bischoff, Aug. 1, 2017