Dividing assets is a primary focus for most divorcing spouses, in Arizona and across the nation. When there are retirement assets involved, spouses must make every effort to fully understand the rules associated with each account. Failure to do so can result in negotiating a divorce settlement that is unbalanced.
Retirement funds are different from real estate, cash savings and other types of assets. Not all retirement plans are equal, and some have penalties and hidden costs that change their value. For example, a Roth IRA has taxes paid at the time contributions are made. This means that the value of the investment is left whole when the time comes to call the plan into action. On the other hand, 401(k) plans are taxed at the time that distributions are made, making their face value seem higher than it truly is.
Another issue comes into play when a spouse needs to access retirement funds to pay off the interest of the other party. If those funds are pulled from a 401(k) account, there is a one-time distribution rule in effect that will avoid the 10 percent withdrawal penalty that would otherwise apply. An IRA has no such protection in place.
The best way to make financially savvy decisions regarding the division of retirement assets is to work with an Arizona attorney who is highly skilled at such transactions. He or she can review the full scope of a couple's investments, and determine a division strategy that retains the highest possible volume of wealth. That leaves more to go around for both spouses, which is in the spirit of a fair and balanced divorce settlement.
Source: U.S. News & World Report, "12 Steps to Protect Your Money in Divorce", Christine Giordano, Aug. 15, 2016