Retirement savings accounts have strict penalties built into them to prevent early withdrawals. Withdrawing money early could result in a lower standard of living during a person’s retirement years. Since retirement accounts such as 401(k), IRA and pension plans may be considered community property in California, it’s important for them to be divided properly in order to avoid such fees and tax penalties.
Pensions and 401(k) plans may be divided without the risk of penalties via a qualified domestic relations order, or QDRO, issued by the divorce court. Although an employee would normally be subjected to a 10 percent tax penalty if they make a withdrawal prior to retirement age, that penalty does not apply as long as their attorney ensures a QDRO is included in the divorce documents.
Individual retirement accounts are not protected from early withdrawal penalties with a QDRO. In order for divorcing couples to avoid losing a significant portion of their retirement investments, they have to follow the specific requirements outlined in IRC Section 408(d)(6). The Internal Revenue Code states that in order to avoid the tax penalty, the owner of the IRA must transfer their interest in the IRA to their spouse and have a IRC Section 71(b)(2) instrument ratified by a court.
Retirement accounts are the most valuable asset in some divorces. Separating them properly may ensure each spouse leaves the marriage with the appropriate amount of the community property so that they have a chance at having a secure future. An attorney could help make sure the proper paperwork is filed so that the client won’t have to pay a tax penalty when they withdraw money from their IRA, 401(k) or pension account.