The division of retirement assets in a divorce is a complicated matter that, if not handled appropriately, may result in unpleasant tax consequences and penalties for both the breadwinning spouse and the spouse who will be receiving the benefits as part of the divorce settlement. In another scenario, each spouse may be contributing to their own retirement plans through their respective employers, but one spouse may be funding his or her account at a much higher rate due to having a higher salary. Since Florida is not a community property state, dividing retirement benefits in Florida divorce cases is done according to the equitable distribution rule, meaning that property and debts are divided in a manner that is fair and just, but not necessarily equal.
Retirement accounts differ from other assets in that they have been funded with pre-tax dollars. Therefore, one spouse cannot simply transfer money from his or her account to that of the other spouse without triggering an income tax liability and a penalty for the early withdrawal of funds. To avoid these complications, a Qualified Domestic Relations Order (QDRO) may be used to handle the division of retirement benefits. The QDRO allows the court to transfer a percentage of one spouse’s retirement funds to an account in the other spouse’s name without causing adverse tax consequences. In essence, a QDRO is a “loophole” that preserves the tax-deferred status of a retirement account.
While QDROs make it easier to divide retirement benefits in a divorce, other financial issues may complicate this process, such as pre- or post-marital interests, as well as the tax consequences of one spouse having to take money out of a retirement account in order to pay for some other aspect of the divorce.
It’s crucial to seek qualified professional advice when attempting to split retirement benefits so that you don’t inadvertently create tax liabilities and penalties. Contact us to discuss your questions and concerns with regard to the division of assets in your Florida divorce.