Quatela Chimeri, PLLC

Improperly dividing IRAs in divorce can have negative impacts

Ending a marriage can be a tricky time for anyone. There are many aspects to consider, and even after the divorce settlement has been reached, individuals could easily find themselves having to deal with difficulties resulting from those terms. In particular, some property division decisions could have negative repercussions if not properly handled, especially when it comes to taxes.

Because retirement accounts typically fall into the category of marital property in New York, it is possible that the funds in these accounts will need to be split during divorce. When it comes to dividing an IRA, individuals may want to remember that the funds in those accounts are subject to taxation. If parties must give a portion of the money to their ex-spouses, they may want to remain conscious of how to properly withdraw and award those funds.

If a person withdraws the money and transfers it to a checking account for an ex, that individual could be hit hard later when it comes to taxes. Instead, the individual may find it more useful to transfer the funds to an IRA in the ex-spouse's name or to change the name on the current IRA to the ex. The details of the divorce order could help ensure that these steps are properly taken.

It can be difficult for individuals to understand the right way to transfer money, especially when it comes to retirement accounts. In some cases, special forms or certain actions may be needed to avoid tax penalties on transfers. During the divorce process, parties may want to take steps to include details in their settlement agreements regarding which individual will take responsibility for certain expenses and fees associated with property transfers. In order to better understand how to avoid penalties, consulting with New York attorneys may prove useful.

Source: financial-planning.com, "When your clients divorce, avoid this costly IRA mistake", Ed Slott, May 15, 2018

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