Piershale: Protecting your money in divorce – Northwest Herald

When people divorce, their assets are usually split, including their retirement accounts.

If mistakes are made during this process and taxes and penalties are involved, things get even more complicated. So let’s see how retirement assets are affected.

To properly divide an IRA because of a divorce, language specifying who receives what should be included in the marital settlement agreement or the divorce agreement.

A copy of this executed agreement should be given to your IRA custodian.

The money should not simply be withdrawn from the IRA and handed to your ex-spouse. This would be treated as a taxable distribution to the IRA owner. Instead, the funds should be transferred to the receiving spouse’s IRA.

On the other hand, employer sponsored retirement plans or qualified plans cannot be split by a divorce agreement.

These plans require a special court order, known as a qualified domestic relations order.  Once a qualified domestic relations order has been issued, it should be sent to the employer plan administrator. The terms of the plan decide when you get the money.

In some plans, a lump sum is available immediately. In others, the benefits might not be payable until the ex-spouse retires.

So what happens when you finally get control of the money? If you are receiving funds from an IRA, you should move the funds over to your own IRA to avoid taxes and, possibly, the 10 percent early distribution penalty.

However, if you’re getting money pursuant to a qualified domestic relations order (this means money from an employer plan), then you strongly should consider whether you will need the money before you are age 59½.

This is because money received directly from a plan – under a qualified domestic relations order – are exempt from the 10 percent penalty. Not so in an IRA.

If instead you roll that money over to an IRA and later you make a withdrawal before you are age 59½, you will pay the 10 percent early penalty, unless it is a qualified exception.

Finally, one of the most common mistakes after a divorce is the failure to properly update beneficiary forms.

We hear of nightmare after nightmare of people that did not have the right beneficiaries on their accounts. This is not something that should be overlooked. There have been many documented cases where a failure to simply update a beneficiary form led to an ex-husband or ex-wife receiving funds that were intended for your children or your new spouse.

Don’t let this happen to you. Please make a note to update your beneficiary forms ASAP.

• Mike Piershale, ChFC, is president of Piershale Financial Group. Send any financial questions you wish to have answered in this column to Piershale Financial Group Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You also may fax them to 815-455-6895 or email mike.piershale@piershalefinancial.com.

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