When getting a divorce, it’s common that the bulk of the assets that need to be divided are housed in retirement plans. Special paperwork needs to be drawn if monies are to come out of a qualified retirement plan. These are called QDRO’s – Qualified Domestic Relations Orders.
QDRO’s allow money to be moved out of qualified retirement plans to a different owner without tax penalty. What this means is that if spouse 1 has a 401k or other retirement plan, and money needs to be dispersed to spouse 2, the money can be moved out of the plan without a tax penalty to either party.
The person receiving the money has the following choices:
The money coming from the retirement plan can be transferred to an IRA. This is a tax free, penalty free transaction. However, investing in an IRA may involve fees and commissions.
Another option is the money (or a portion of the money to be received) can be withdrawn from the retirement plan and sent to the receiver. If the money is withdrawn from the retirement plan, a 20% federal income tax will be withheld from the funds. There is no tax penalty in addition to that – even for people under 59 1/2. What is important to note about this choice, is that this is a one time opportunity. You are allowed to take a withdrawal one time from the retirement plan without a penalty. After that, the early withdrawal penalties apply, if you are under 59 1/2. This can be a great financial planning opportunity for a newly divorced person. Money that they are getting from an ex spouses retirement plan can be withdrawn before 59 ½ without penalty or rolled over into an IRA. Distributions that are not rolled over into an IRA are subject to ordinary income taxes, and you will lose the potential for long-term tax-deferred growth.
This information is not intended to be a substitute for specific individualized tax or legal advice. You may want to consult with a financial advisor, CPA and/or a family law attorney on the best choice for your personal situation.
Sharon L. Herman AAMS, ADPA is the CEO of Silver Key Wealth Management, and affiliated with LPL Financial, the largest independent broker/dealer* in the United States. She is a member of the Working Women of Tampa Bay, the Sierra Club, and the Tampa Seminole Club. She is also a 2012 finalist for the Tampa Bay Business Woman of the Year award given by the Tampa Bay Business Journal based on community volunteerism, business principals and customer satisfaction.
*Financial Planning Magazine (June 1996-2013 based on total revenue)
The opinions expressed in this material do not necessarily reflect the views of LPL Financial.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners. IFP is a registered investment advisor. IFP and Silver Key Wealth Management are separate entities from LPL financial.
Ms. Herman may only discuss and/or conduct transact securities business with residents of FL, MI, GA, NJ, VA, TX. www.finra.org. www.sipc.org