Splitting assets during a divorce requires a close examination
If you’re getting a divorce in Michigan, several factors must be considered. One of them is how you’ll be splitting 401(k)s, IRAs and annuities. These investment vehicles have specific administrative rules and benefit provisions, making them challenging to deal with during the divorce process.
Handling a 401(k) during a divorce
A few options are available when you’re getting divorced and a 401(k) is involved. One spouse can keep the 401(k) in exchange for another equally valued asset. Doing so is likely the least complicated choice. Dividing the 401(k) can also be considered. However, the plan should be carefully examined before proceeding. Liquidating it to pay one spouse is usually the least desirable choice as there will be tax consequences. Rolling a 401(k) into an IRA is a good choice as it avoids the tax liability and penalties.
Another point to consider when dividing a 401(k) during a divorce is obtaining a qualified domestic relations order, or QDRO. This is a court order separate from the divorce decree.
Handling IRAs during a divorce process
Splitting IRAs during the divorce process is more straightforward than dividing a 401(k). Tax consequences must be considered as Roth distributions will be tax-free. Community property state rules should also be examined, especially if you or your spouse had the IRA before marriage.
Splitting annuities when getting divorced
Tax consequences must also be considered when splitting annuities during a divorce. Asking your annuity carrier how it’s handled is essential. Having one spouse keep the annuity in exchange for an equally valued asset can make it easier to contend with. Otherwise, a common way to divide an annuity during a divorce is to start one or two new contracts, depending on how the annuity will be split. Performing this method has the least tax consequences if the split is performed.
Examining each choice is crucial when splitting assets during the divorce process. Couples need to pay close attention to tax consequences in order for the division to be fair.