Many West Virginia residents work for years to save money for their retirement.

Whether through individual retirement accounts or company-sponsored retirement plans, money can often be set aside on a tax-deferred basis. However, tax implications can arise should an individual go through a divorce prior to receiving the contributions from a retirement account. Careful consideration should be given to handling these types of accounts to avoid potential problems with the Internal Revenue Service.

When it becomes necessary to divide retirement accounts in a divorce settlement, a qualified domestic relations order, or QDRO, is necessary. A QDRO designates a portion of benefits payments or a retirement account balance to be paid to an ex-spouse. It also stipulates that the recipient of those payments is responsible for any related incomes taxes. If a plan allows, the ex-spouse may be able to roll over the distribution from the account into an IRA and defer paying taxes until withdrawals are made.

It is imperative to have a QDRO in place before distributing money to an ex-spouse. Without one, the distribution could be treated as a taxable payout. Not only would taxes be due on the amount, the distribution would likely put someone in a higher tax bracket. To compound matters, a penalty tax would also be added if someone was under age 59 1/2.

While a QDRO is not necessary to divide an IRA, it pays to exercise caution when dealing with this as well. A tax-free transfer can be made from one IRA to another. However, if a divorce agreement does not expressly say that all or a portion of an IRA balance be transferred to an ex-spouse, the distribution could be considered taxable.

Going through a divorce can be a stressful situation. It would be helpful to minimize any potential financial or tax complications from the beginning of the process. A West Virginia divorce attorney can provide valuable guidance in the proceedings. An experienced lawyer will work to protect a client’s interest and achieve the best outcome possible in the divorce.

Source: marketwatch.com