Consider tax implications of dividing qualified assets in divorce

On Behalf of | Nov 23, 2020 | Divorce |

When you divorce, you and your spouse may have qualified assets to divide. These include 401(k)s, IRAs and annuities.  As Kiplinger explains, dividing these assets may impact your tax liability. 

Dividing a 401(k)

Your spouse has the right to claim all or part of your 401(k). If you are not yet ready to retire and your plan prohibits you from dividing your account before retirement, you have other options. 

Either you or your spouse may retain the 401(k) while the other takes ownership of a different asset with the same value as the account. You may need to consider the growth potential of assets as you calculate equitable exchange values. 

If you are no longer with your employer or are older than 59 ½, you may save taxes and penalties by rolling the 401(k) into an IRA.  Another alternative is to liquidate the account, but this option requires approvals and may trigger taxes and penalties. 

Splitting an IRA

If you and your spouse opened an IRA during the marriage, your IRA is a marital asset subject to division. Contributions made during the marriage with joint funds may also constitute marital assets. 

You can often divide an IRA with a trustee-to-trustee transfer. This may help you minimize tax consequences and penalties. If you have a Roth IRA, the value assigned to the account may depend on whether you make pre-tax or after-tax calculations. 

Handling an annuity

The division or surrender of an annuity may involve penalties, tax consequences and surrender fees. You may withdraw from an existing annuity and enter into one or two new contracts, depending on whether one spouse or both will own the annuity after divorce. While these transactions may offer tax savings, distributions remain taxable. 

You may also decide to have one spouse withdraw all or part of the annuity and distribute proceeds. However, this may affect taxes, benefits, surrender fees or the surrender period.