Divorce can be a challenge to navigate in Kentucky and financial issues are perhaps the most challenging. It is particularly important that these accounts be handled correctly in order to avoid an unnecessary tax burden. IRAs and 401(k)s can both be divided without incurring penalties or taxes at the time of the split as long as the transactions are appropriately handled, thus maintaining the value of the retirement assets.
In dividing an IRA, the legal term to be aware of is “transfer incident to divorce.” This is a process that allows the fund to be divided between two people without incurring any taxes at the time of the split. However, it must be specified that the split is occurring as a transfer incident to divorce. When this is done correctly and using the appropriate language, the recipient can transfer funds into his or her own account and not pay any taxes until money is withdrawn for retirement purposes.
To split an 401(k), there is an order that must come from the court. This is called a QDRO, a Qualified Domestic Relations Order. Like the IRA process, this allows for the splitting of a 401(k) without incurring taxes and the recipient can move the funds into a qualified retirement plan.
Arriving at an agreement regarding the division of retirement assets can be difficult and emotionally draining. People sometimes develop an attachment to the funds that have been amassed during one’s career. This can come out of loyalty to a company where a person spent a significant chunk of one’s career. Looking to a legal professional experienced in financial divorce settlements in Kentucky may help to ease some of the emotions.