In divorce, there are many things to consider with retirement accounts. Here are 5 important facts/questions to keep in mind when dealing with such accounts during a divorce.
- Tax Free Division. In Minnesota, retirement accounts that were created during the marriage are typically treated as marital property and they can be divided. A division of a retirement account can often occur tax-free as long as it is an in-kind division and remains in retirement form for both after division.
- Penalties and/or Tax Consequences. If either party chooses to cash out retirement dollars pursuant to a divorce, there may be penalties and/or tax consequences.
- Comparing Retirement Assets to Other Assets. When comparing retirement assets to other assets, such as investment accounts or real estate, taxes need to be considered. Because many retirement accounts are pre-tax and will be taxed in the future, the values are not dollor-for-dollar the same as cash.
- Comparing Value of Retirement Assets. There are different elements to consider when evaluating the value of a retirement account. The amount in the account is only one aspect. Also consider the tax status of the contributions (before or after-tax dollars) and how accessible the funds are before and during retirement.
- Creativity in Retirement Awards. There are ways to divide retirement and cash out the assets to avoid some penalties. For example, a 401k may be divided during a divorce. If the recipient chooses to cash out some or all of the distribution as part of the divorce, they may avoid the 10% early withdrawal penalty, but they will be taxed. Creative resolutions regarding retirement may help parties to meet their goals.
Using a financial neutral during a collaborative divorce can help parties fully understand the financial implications of retirement dollars and come up with unique resolutions.