Divorce typically requires that each party participate in the division of assets, both physical and non-tangible, and a father’s rights during divorce also include the right to fair distribution of assets. Included among these assets are retirement and savings accounts such as 401(K)s, traditional and Roth IRAs, and TSPs, or Thrift Savings Plans.
While these are not the only possible types of accounts that can be adjusted during a divorce, they are especially common and can pose unique challenges not faced by alternatives such as checking accounts.
Here is an overview of the most effective strategies for dividing 401(K), IRA, and TSP assets during divorce to minimize fees and other penalties and preserve as much wealth through the process as possible.
It is strongly recommended that fathers work with a legal professional during this time to assist in acquiring the proper documentation and forms necessary for banks and investment firms to avoid some associated fees.
Dividing a 401(K)
A 401(K) is a type of tax advantaged retirement account that is tied to employment. An employer may or may not elect to contribute to the 401(K) alongside the employee, and eligibility for a 401(K) phases out based on income.
Any assets accumulated within the 401(K), including both contributions and gains, during the course of the marriage is considered marital property. If the 401(K) was created after the marriage was legally ratified, all of the account is eligible for division during a divorce.
Because 401(K)s enforce penalties for early withdrawal before the age of 59 ½, attempting to reallocate the funds can impact their value for those not already at retirement age.
Strategic attempts to circumvent this consequence include obtaining a QDRO, or qualified domestic relation order. This permits a rollover of the funds from one spouse to another without incurring the early withdrawal penalty. However, the transferred amount is still subject to income tax.
Dividing an IRA
The process of reallocating funds from an IRA is similar to that of a 401(K), regardless of whether the IRA is traditional, Roth, SEP, or something else. However, a QDRO does not apply to an IRA, and relevant penalties may still be assessed.
A withholding tax and income tax will apply as normal in cases in which one spouse takes a full or partial payment from the IRA. The best way to circumvent potential penalties and maintain as much of the original balance of the IRA as possible is to transfer ownership of the account in full.
For instance, if the former husband owns an IRA in his name only, he may legally change the name on the IRA to his former wife’s name. She now owns the account, and no money transfer took place, avoiding potential penalties and tax implications.
Dividing a TSP
A TSP, or Thrift Savings Plan, is a type of retirement account specific to civil service employees and those who formerly belonged to the uniformed services. It cannot be redistributed using a QDRO because it is not a private-sector retirement option.
Instead, an RBCO (retirement benefits court order) may be used to move the funds within an TSP. Alternatively, the court may create a property settlement agreement. Should an RBCO call for the division of assets within a TSP, the order must be extremely specific.
TSPs cannot pay out a variable rate over time, nor may it pay more than its vested balance. Instead, the court must order either a specific dollar amount payment or a percentage.
To avoid potential losses on the value of TSP payments during divorce, the best method is to transfer the TSP money directly to a tax advantaged retirement account. Taking distributions from the Thrift Savings Plan will incur a taxable event.
A spouse can only be awarded up to 50% of the value of the TSP, and the amount eligible for calculation of this 50% is confined only to the earnings accrued within the duration of the marriage.
However, the court order can revise the wording to claim a portion of the total balance, which can secure a higher amount for the other partner upon asset division.
Get Help Keeping Asset Division Equitable
Divorce can be a challenging time for one’s finances, retirement accounts inclusive. However, there are many ways to mitigate the impact that a divorce can have on retirement balances making it imperative to work with a legal professional during this sensitive time.
The attorneys at Milstein Siegel can help you navigate your financial well-being during a divorce and preserve your retirement assets as much as possible.
Contact Milstein Siegel to schedule a consultation to share your current retirement situation and learn how to fulfill the court order in a strategically competent manner.