According to a survey by the American Academy of Matrimonial Lawyers, splitting retirement accounts is the second most contentious issue for divorcing couples. This is understandable as many retirement accounts can become major assets. When these funds are split, Ohio couples will need to follow certain regulations in order to avoid having to pay tax and penalties on the distribution.
For a 401(k) or pension plan, they will need a document known as a qualified domestic relations order. A lawyer should prepare this document. The plan's administrator must approve it, but the couple should also review it to ensure that everything is consistent with the divorce agreement. A spouse can receive the distribution directly or roll it into an IRA. While there will be a regular income tax on the direct distribution, no penalty will be accessed.
For an IRA, there will be paperwork from the bank or financial institution to complete. Furthermore, a copy of the divorce decree may be necessary. A QDRO is not required, but the distribution must be rolled into another IRA. Otherwise, a recipient may have to pay taxes as well as penalties.
A spouse should also be wary of changing their beneficiary designation on the retirement account until the divorce is finalized. If the account holder were to pass away before the divorce, the other spouse may get nothing.
Divorce can be difficult, but it is important for people to make sure they secure themselves financially during the process. If a couple is trying to negotiate a divorce agreement instead of going to court, they should both make an effort to cooperate. However, a spouse may want to work out a financial strategy ahead of time with an attorney.