By Michelle Ann Benedek, Esq.
Question: "How will my retirement assets be distributed and will any penalties or taxes be imposed on the transaction?"
Retirement assets distributed as part of a divorce do not incur the taxes and penalties normally associated with an early withdrawal. Typically, any retirement assets that are accrued during the marriage are divided equally between the parties. An equalization process takes place after the Judgment of Divorce is entered by the Court.
This equalization process has several phases. Retirement vehicles such as pensions and 401K's require a separate order called a Qualified Domestic Relations Order to distribute this asset and avoid any taxes and/or penalties as a result of the transaction. This Order is often drafted by a Pension Appraisal specialist. The draft of the Qualified Domestic Relations Order is then sent to the administrator of the retirement plan for approval. Once the order is approved, it is then executed by the Court separate from the Judgement of Divorce. The filed order is then provided to the plan administrator to effectuate distribution into the receiving spouses retirement vehicle . In the case of pensions, the actual distribution goes into effect when the pension goes into pay status. In that event, the alternate spouse receives a monthly pension payment directly from the distributor.
The equalization of an IRA is more simplistic and does not require a separate order of the Court. The parties can utilize their Judgment of Divorce and Property Settlement Agreement to effectuate the transfer of an agreed upon amount from one IRA to another IRA. This transaction, as part of a divorce, also does not incur any penalties or tax implications.
