Beware Potential Tax Issues When Dividing Assets in a Divorce


In the rush to get a divorce over and done with, some couples may prioritize speed over careful consideration of each issue. While this might seem like the right thing to do in the short term, in the long term it could have serious consequences for your financial health.

One example of the impact that rushing to a resolution could have is in retirement savings. Retirement savings are intially collected from our pre-tax income and set aside for the long term. We don't pay taxes on our retirement accounts until it comes time to make a withdrawal, which we typically save for when we need to use those funds for retirement. However, some methods for dividing assets during a divorce could also cause us to make a withdrawal from that account, which means we could pay taxes on the income prematurely.

Paying taxes earlier than we need to diminishes the principal amount of our savings, which will also impact our long-term savings goals for retirement.

This problem arises most frequently in the case of a shared retirement account that must be divided. Transferring these assets in the correct way will avoid taxation, but a hasty transfer without attention to detail could land a part of your life savings in the hands of Uncle Sam. One crucial aspect is to include the transfer of retirement assets in the divorce decree itself or in a maintenance agreement incident to the divorce. When including the transfer as a part of the decree, the specific account numbers and locations where the accounts are held must be included. In addition, the transfer must occur after the divorce is finalized so that the person making the withdrawal will not pay an early withdrawal fee (if they are under 59 years old).

As you can see, the division of assets during a divorce is a complex issue that requires expertise to spot all of the potential pitfalls. Contact our office for help today.

Source: Fox Business, "How to Split up Retirement Assets in a Divorce," Marilyn Bowden, Sept. 16, 2013.

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