Spending years saving money in your IRA might have been your key to a comfortable retirement, so when divorce looms on the horizon, you want to keep as much of it as possible. If you and your spouse are on the same page, you have a chance to work out a smooth division of the account. Still, you want to avoid some mistakes that could cost you.
Some couples do not know how to properly divide an IRA. The result could be the loss of money that you may have held onto otherwise. The Street gives a rundown of mistakes you should avoid.
Be precise in your terminology
Divorces do not divide all retirement accounts in the same way. Some plans require a Qualified Domestic Relations Order, known commonly as a QDRO. If you divide an IRA, you will use a process called a transfer incident to divorce. Be sure you have not mixed up these terms when you prepare the paperwork. Additionally, use the correct legal terminology in your documents. Incorrect wording can slow down the process or lead to a return to court.
Watch for tax consequences
Withdrawing money from an IRA early may incur tax penalties. Be vigilant to follow federal guidelines to avoid losing money to taxes. As The Street points out, federal law permits IRA withdrawals provided that your divorce settlement or decree provides for a transfer of funds and that you transfer IRA money to another IRA owned by your spouse. Given that tax law is subject to change, it is important to get the most current information before dividing your IRA.
Choose your division carefully
When it comes to retirement accounts, many couples want an equal split. If so, consider how you will divide your account. Some couples divide by specific monetary amounts. Sometimes this does not work out because an account may have acquired more money or lost value since the couple worked out their agreement. As a result, you and your spouse may receive more or less than a 50/50 split. Consider splitting the IRA by percentage to increase your chances of receiving an equal share.