By Eric Reich
Going through a divorce is a terrible experience, even under the best of circumstances. Emotions run high. Decision-making ability might not be at an all-time high. While some of those decisions might not have major consequences, others, like the division of retirement assets, could have a massive impact on your finances. This week, I thought we would clear up any confusion around how different types of assets are divided, such as retirement plans, IRAs, etc., and what to do with them once they are.
Retirement Plans
A retirement plan, and I’m speaking about ERISA plans, are plans governed under the Employee Retirement Income Security Act of 1974. This includes most employer-sponsored retirement plans such as 401(k), deferred compensation or profit-sharing plans. It does not include public sector 403b plans, Simplified Employee Pension Plans (SEP) or IRAs. Retirement assets are divided by what is known as a Qualified Domestic Relations Order (QDRO). A QDRO is ordered by the court. The rules of the plan will determine when you can get access to the funds. Some plans allow for immediate withdrawals, while others will segregate the funds, but they aren’t distributed until a future qualifying date. If you are receiving funds from a QDRO, you want to carefully consider your options. You can roll the funds over to your IRA. However, if you are under the age of 59 and a half and take a withdrawal after the funds are in your IRA, you can be subject to the 10% penalty. If you receive the funds directly from the QDRO, that distribution is not subject to the 10% penalty. Any withdrawals will, however, be subject to income tax.
IRAs
IRAs, unlike ERISA plans, are divided based on your Marital Settlement Agreement (MSA). Any distribution made from an IRA that isn’t rolled over into your own IRA is a taxable distribution and potentially subject to the pre-age of 59 and a half 10% penalty. If you are the person who has to give your ex-spouse part of your IRA, and you simply take the money out of your IRA and give it to your ex-spouse, then that withdrawal is taxable to you. It is then deemed that you made a gift to your ex-spouse. That means you pay all the tax and not your ex. This is why it is so important that you transfer the funds directly to your ex-spouse’s IRA.
Once all of the assets are divided, you will want to make sure that you update your beneficiary forms for both your IRA and retirement plan. Also, update those forms for any other things that transfer via beneficiary and not your will, such as life insurance policies, annuities, etc.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
