San Jose Divorce Attorney Discusses Retirement Plans and Settlement
Many people who are in a divorce are faced with many issues regarding division of assets and settlements. One of those problems is the division of a retirement account. If some of the portion of your settlement consists of retirement assets, you should be aware of the tax ramifications and potential penalties involved. William Donaldson and Adam Westphalen in their article state the penalties involved when parties are subject to divorce and must divide their retirement assets.
West phalen and Donaldson advised that most of the time, distributions from a retirement plan prior to age 591/2 are considered “early distributions” and are subject to a 10% penalty tax as well as ordinary income tax. There is an exception to this rule. It is a transfer to an ex-spouse as part of a divorce settlement. A Qualified Domestic Relations Order (QDRO) is used to affect this transfer. Income taxes still apply, so any assets you receive from a “qualified plan”, such as a 401(k), will be subject to a mandatory 20% tax withholding. This means that, if you are awarded a $100,000 distribution from an ex-spouse’s 401(k) you will actually receive only $80,000.
To avoid this mandatory withholding, the transfer must be made directly to another retirement account, such as your own IRA. Once the assets are in your retirement account, you are now subject to the early distribution rules. If you need some of the assets to live on, or pay bills, make sure you take them out prior to transferring them to an IRA to avoid the 10% penalty.
If you have questions regarding your divorce and retirement asset issues, please contact our office for a free consultation. Our team of Family Law Attorneys can assist you with all aspects of your case. We have Family Law Attorneys in San Mateo, Monterey, Fremont, Salinas, and San Jose. Please call Sagaria Law at 408.279.2288 for a free consultation or visit us a www.sagarialaw.com.