Financial issues rank among the most complicated and contentious elements of many Georgia divorces. In many cases, the parties spend a great deal of money fighting over money. Addressing property division becomes even more complicated when a retirement plan is at issue. If you are involved in a divorce that involves a qualified retirement plan, you need to have a basic understanding of how this type of asset is handled.
Avoiding taxes and penalties
Addressing the matter of dividing a retirement plan properly is imperative, and not just because applicable law mandates a division of assets in a certain manner. The failure to appropriately divide a retirement plan can result in what may amount to a significant tax liability and financial penalties.
Creation of a qualified domestic relations order
If a pension is being divided, a qualified domestic relations order needs to be created. In basic terms, a QDRO permits the division of certain types of retirement funds between divorcing spouses without any negative tax consequences or penalties, but only if it is prepared correctly.
An example of the process of such a division is illustrative. If a wife has a qualified retirement plan like a 401(k), the husband will have an interest in some percentage of what is contained in that investment pursuant to the laws governing marital assets. Either by agreement between the parties or by an order of the court, a determination is made as to the percentage of an interest the husband has. That percentage is set aside to the husband via a QDRO without any negative financial consequences to either party. It should be noted that the division of an individual retirement account does not require a QDRO, but there are certain tax consequences if it is not handled properly.