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Tax issues when splitting retirement accounts in a Utah divorce

The thoughts of Utah couples who are ending their marriages often turn to the division of their property. What they need to know is that there is more to consider than just who will receive which assets in the divorce. Many people fail to take the time to look at the tax implications associated with the division of certain assets.

For example, nearly every retirement account has tax consequences for early withdrawals. Even so, the marital portion of these accounts are often divided in a divorce. Therefore, the method in which the other party's portion of the account is transferred needs to be considered.

It would not be advisable to simply withdraw the funds from the account since taxes would be owed on it. If the account is an IRA, the portion of the account that is going to the other party can be transferred from the IRA directly into the other IRA. There will be no taxes assessed on the amount.

Things get a little more complicated for non-IRA accounts (401K and 503B). The money can be transferred tax-free, but the IRS requires a Qualified Domestic Relations Order (QDRO) in order to make the transfer. The order will need to include the amount that will be transferred along with the judge's signature. 

If retirement accounts are going to be divided during a Utah divorce, each party needs to be sure how to best effectuate the transfer in order to avoid unnecessarily paying taxes. When the judge approves a settlement and the parties are officially divorce, there could still be matters that need to be resolved. As part of the settlement agreement, the parties need to set a time limit to make any such transfers occur.

Source: The Huffington Post, "4 Hidden Tax Issues in Your Divorce", Stann Givens, June 13, 2016

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