In divorce cases in Pennsylvania and around the country in which a spouse has accumulated money in a retirement account or a non-qualified plan, the accounts held are in most cases subject to property division. It is important to understand how to correctly divide these accounts and to avoid making errors that could cost significant sums.
One big error commonly made by the party receiving assets from a retirement account is taking the amount as a lump-sum withdrawal. Such withdrawals can subject the amount withdrawn to taxes and potentially also cause an early withdrawal penalty to be assessed. It is better for recipients to roll the funds over into another retirement account in their name. People who will draw some of the money must make the election to do so before rolling over the remainder into their own retirement account to avoid the early withdrawal penalty.
People should also take care with how a pension will be divided. Some types of divisions will benefit one divorcing spouse over the other. With defined contribution plans, it is also important for the recipient to state that all contributions through the date of divorce should be included in the division of the account. Nonqualified plans require the party that holds the account to set up a constructive trust to hold their former spouse’s share. People should define what proportionate share each will have of the assessed taxes.
Equitably dividing retirement accounts in a divorce may be very complicated, and it is easy for people to make errors in how they go about doing so. They need to make certain that they are fully aware of the potential consequences involved with different division scenarios, and they thus may want to discuss this matter with their family law attorneys at the outset.