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Marital Property Division

Be Careful When Dividing Retirement Plans in a Divorce

Does divorce always happen after a flash-in-the-pan marriage? Sometimes. Yet, other couples can spend years or even decades married before deciding to divorce. In fact, in what is coined a "gray divorce," in the United States, the divorce rate for those 50 years old or older has increased twofold since the 1990s. For example, in 2015, 10 married people out of every 1,000 age 50 or older divorced. Moreover, the divorce rate for those 65 years old and up has approximately tripled since 1990.

This also means that many couples in Los Angeles are divorcing either right before, or right after, retirement. A gray divorce can be costly in this sense, as both parties were counting on having a certain amount of income during their retirement. However, after the divorce, their income has gone down by as much as 50 percent. This is why it's important to fairly divide complex assets like retirement accounts, 401(k)s and pensions.

For example, to transfer an IRA, it must go between trustee-to-trustee. If it is comprised of a single check made payable to your ex, you could be taxed or penalized. Any IRA division must be accounted for directly in the divorce decree. This way, the transfer can be considered to be one that is "incident to divorce." Moreover, transfers from an IRA should only be made once the divorce is finalized; otherwise, it will be considered by the Internal Revenue Service to be a taxable distribution.

If a couple is dividing other, non-IRA, retirement accounts, they may need a qualified domestic relations order. Without one, any amount transferred may be deemed by the IRS to be taxable income. However, QDROs are complicated, so it is not something you want to handle alone. An attorney can assist in such endeavors.

Many older couples, especially high-asset couples, can find their retirement plans are not what they thought they would be if they go through a gray divorce. However, with the right help, they can ensure that their retirement assets are divided fairly and appropriately to avoid incurring any unnecessary taxes and penalties.

Source: CNBC, "A costly 'gray divorce' can upend your retirement plans," Tim Sobolewski, June 21, 2017