How can I lose retirement money to taxes in divorce?

On Behalf of | Nov 9, 2022 | High-asset Divorce

After years of accumulating money in your retirement accounts, you probably fear your retirement plans are in jeopardy because of your upcoming divorce. Given the complicated nature of high-asset divorces, you should take note of which accounts you will have to split between you and your spouse.

The Motley Fool explains that retirement accounts generally qualify as marital property. However, the rules for dividing and taxing these accounts vary depending on the type of account you own.

Rules that apply to retirement accounts

Sometimes you can use your divorce decree to divide an account such as an IRA or a government retirement plan without incurring penalties. However, a 401(k) operates under different government rules. In this case, you will need a Qualified Domestic Relations Order to split the 401(k), so some of its contents can go to your spouse.

The federal government also does not tax retirement accounts the same. Depending on the account you own, you may have already paid taxes when you contributed money to it. A Roth account is a common example. Conversely, you pay taxes when you make a withdrawal from an IRA or a 401(k).

How taxes affect your account share

It is important to know when you pay taxes on an account since you could end up with less money than you expect. For instance, if you have the same amount of money in a 401(k) and a Roth account and divide them equally, you will actually get less money from the 401(k) because you will have to pay taxes on the 401(k) withdrawal.

The possibility of losing money because of taxation makes it important to calculate how much you will receive from each account after applicable taxes. You may decide to trade other assets to your spouse in order to retain a full account if that is your priority.

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