Regardless of the whether or not a divorce was agreeable or highly contentious, the tax implications of this life-changing event can get complex, particularly when it comes to retirement plans and asset division. As most people across the nation work to complete their taxes, those who divorced last year likely have to consider how the divorce impacts them, particularly when it comes to assets held in retirement plans. Even though every financial agreement or arrangement between parties in a marriage varies, Michigan residents may find it interesting to learn that it is not uncommon for only one spouse to have a retirement plan. In a divorce, retirement plans are considered to be a marital asset and dividing it up has tax implications.
Divorce is a difficult process for many, but it is essential for both parties to consider the tax implications and look at the applicable tax laws. In order for the tax code provisions on matters of division of martial asset, spousal support and more to apply, the parties must have a divorce decree in place. Parties cannot simply agree between themselves to be divorced or no longer married. There must be a formal order in place.
When it comes to the division of retirement plans, among other issues such as child support or alimony, the parties as a part of the divorce settlement may want to draft a qualified domestic relations order or QDRO. This is a judgment, which when drafted carefully not only assigns part of a retirement plan in another’s name, but it also allows the original retirement plan participant to have the same rights and gives them the opportunity to potentially roll over the funds tax free. However, it important to note that under a QRDO the nature of the retirement plan does not change.
Clearly, the intersection of family and tax law can be a complex juncture. When considering asset division, particularly in regards to retirement plans and whether drafting a QRDO is an option, divorcing parties will want to be sure to get the right information about their options in order to make the right decision.
Source: Forbes, “Taxes From A To Z (2014): Q Is For QDRO,” Kelly Phillips, March 31, 2014