I cannot tell you how many times I have heard a client say, “I don’t want ½ of her retirement because I don’t want to pay taxes!” Good news – if you are dividing retirement accounts pursuant to a divorce, you do not have to pay taxes! You only have to pay income taxes and penalties if you withdraw the funds from a retirement account, same as if you were withdrawing funds from your own retirement account.
Great question! North Carolina law requires an equitable distribution of all marital assets. As part of the distribution, you may be entitled to a portion of your former spouse’s retirement.
Majority of the time the retirement account can be divided using a QDRO (Qualified Domestic Relations Order), or some other document approved by the financial institution that houses the retirement account. The funds that are transferred via QDRO, are placed into an account at the same financial institution, the only difference is that the account is in your name only, so your former spouse does not have access to the account. Also, majority of the time, this document needs to be signed by a Judge and all parties involved.
If you were in a situation that you needed to only withdraw a portion of your new retirement account, you would only pay income taxes and penalties on that portion of the account while the remaining portion continued to grow.
Equitable distribution sounds easy (50/50, right?!), but there are ways that you can obtain more than 50% of your marital estate. One of the 12 factors that a Judge would consider is whether your opposing party would receive a pension, retirement, or other deferred compensation rights that are not marital property. In order to make the distribution of assets more equitable, you may be entitled to more than 50% of the marital portion of a retirement account considering the former spouse’s nonmarital property.
The most important item to remember is to update all your beneficiaries on any accounts postseparation and update any estate planning documents.
Please let us know if you have any questions or if we can assist you in any way!