When you’re in the midst of a divorce, you’ve got several things on your mind. Understandably, you may not be thinking about how your high-asset divorce will affect your taxes. However, there are some considerations you should explore when it comes to dividing your 401Ks, IRAs, and annuities. If you’re a Texas resident, here are a few key points to keep in mind.
Dividing your 401Ks and pensions
Diving your pension and 401K can seem daunting in a high-asset divorce because you’ll need to get a Qualified Domestic Relations Order (QDRO). This document is a court order that is separate from your divorce decree. According to the QDRO, a spouse can legally access all or a portion of a 401K. Each retirement plan has certain rules and provisions. Some plans require that you wait until you are retired to divide the funds in the account.
Division options to consider
Legal professionals will likely encourage you to make an effort to reach a civil agreement with your spouse when it comes to dividing property and funds in a high-asset divorce. Here are some options to think about:
- One spouse will keep the 401K in exchange for an asset that is equal in value. This is often the least complicated option but requires complicated tax calculations and negotiations.
- Split the 401K. This option may seem less complicated, but it’s important to have a thorough understanding of the retirement plan which can require considerable effort and time.
- Liquidate the 401K to compensate one spouse. This is often not the most desirable approach due to taxes, penalties and the need for legal approval. You/your spouse may not qualify for this option.
- Roll your 401K into an IRA. This allows you to avoid tax liabilities and penalties so you can manage your account. You can only take advantage of this option if you are no longer working for your employee or are over 59 1/2 years of age.
It is best to review your finances and retirement plan before your divorce is final to determine which option will work best for you.