Tax considerations may not be at the top of your list of concerns when working through a divorce, but they may move up quickly if you decide to split retirement accounts. Although Michigan is an equitable distribution state, determining what is fair and equitable is often subjective, and you may find that dividing retirement money is not worth it.
According to Kiplinger, dividing 401(k)s and pension plans is complex with various provisions and administrative rules.
Get a QDRO
A Qualified Domestic Relations Order is a court order that allows the division of certain types of retirement plans. It confirms what portion of the account goes to you and your ex. It also helps you avoid paying the taxes or getting hit with an early withdrawal penalty on a distribution from the plan. If you’re splitting more than one retirement account, you must get a QDRO for each. Plan administrators can detail any additional requirements.
Decide on the distribution
You have three options if you’re the spouse on the receiving end of the distribution.
- Request a direct transfer into your own qualified retirement plan – It helps you avoid paying penalties.
- Wait until your ex retires – At that time, you can take a lump sum or take the minimum required distributions at age 701/2.
- Cash-out the balance – Although it gives you access to the cash, it might come with a 10% early withdrawal penalty.
Although state laws determine the percentage each spouse may keep, you can work out your own arrangements.
Splitting retirement accounts incorrectly can be costly, so understanding the ramifications and processes is critical. Learn more here about negotiating for alternative assets, which may be preferable to dealing with the paperwork and time necessary for completing the split.