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How to divide 401(k)s, IRAs and annuities

On Behalf of | Mar 4, 2022 | Divorce

Divorce for couples in California is never an easy process, but when the couple holds retirement assets like IRAs, then everything gets much more complex when it comes to financial settlements. These assets have special tax rules that make them good for saving but hard to divide up in a divorce.

Retirement and divorce

With 401(k) accounts and other retirement plans, you can contribute money over time, and your employer may also make contributions. Those contributions are exempt from some taxes that would otherwise be due. The accounts grow more quickly that way, but there are rules preventing you from withdrawing from the account until you are near retirement age, and there are further rules about transferring assets out of the account. In a divorce, the settlement has to create a fair division of all of marital assets. The rules governing retirement accounts make them almost impossible to divide easily.

There are different options for different accounts, but none of them are simple. For example, cashing out an account and dividing the money comes with a large tax penalty, plus it ruins the money’s ability to grow and removes the tax benefits. Trying to transfer the saved assets might be difficult, or it might have its own fees. Dividing the finances by awarding one spouse the retirement account and the other spouse other financial assets could trigger income taxes and also requires a large amount of other assets because they need to be approximately equal to the full future value of the retirement savings.

The best answer will depend on the specific situation, but it is hard to avoid financial penalties or fees. Couples will have to plan for these issues when they create a property division agreement.