Common sense would suggest that the best method of dividing funds in a retirement account in a North Carolina divorce proceeding would simply be comprised of adding the contributions together from all retirement plans after the marriage became effective and divide them in half. The problem is that the law is rarely that simple, and the reason is taxation schedules. That is also the case for divorcing couples with retirement accounts. For this purpose, the courts use a “Qualified Domestic Relations Order” for 401(k) or 403(b) accounts while using “transfer incident to divorce” orders for IRA accounts.
Dividing assets from 401(k) or 403(b) accounts can be complicated if the paperwork is not filed correctly with the court. The purpose of using the QDRO is avoiding tax penalties upon a withdrawal. The schedule is somewhat different for a Roth 401(k), as some filers can avoid taxes altogether on their personal contributions. Employer contributions are still taxed at the account holder’s current income tax rate.
Transfer incident to divorce
Individual retirement accounts are distributed differently in a divorce proceeding. Taxation avoidance is once again the goal, and how funds are allocated when reaching a settlement agreement is how avoidance is accomplished. Along with having the right divorce attorney handling your case, this is where the financial professional comes in as a true asset.
North Carolina divorce attorneys advise clients to remember that following proper procedures can mean total avoidance of the early withdrawal penalty. Because of these legal nuances, having an experienced professional is very important when substantial assets are being divided.