Cashing out your IRA in a diivorce

Can an IRA Be Cashed Out During a Divorce?

Whether you’re considering pulling from your IRA during a divorce or you need to transfer IRA funds as part of your divorce agreement, it is crucial to know the potential consequences. There is a right way to handle retirement fund transfers as part of a divorce, and taking a DIY approach can lead to hefty penalties and taxes.

Learn more about how to handle an IRA as part of your divorce. To discuss your legal needs in greater detail and begin preparing for divorce, call Olmstead & Olmstead at 703-260-8752. Our team of Manassas divorce attorneys is waiting to talk to you.

Using Retirement Funds to Cover Cash Flow Problems

Cash flow issues are incredibly common in divorce. Even the most financially stable individuals can struggle when they suddenly have to support double the households on half the income. There are different options available to you when you need to hire a divorce attorney and get established in a new place during a divorce. Drawing from your IRA may not be the best option. If you are younger than 59 1/2, pulling from an IRA triggers immediate penalties. You have to pay taxes on the amount withdrawn plus a 10% penalty.

Additionally, using an IRA withdrawal to fund a divorce can mean sacrificing your future in order to get through the present. Unless you replenish your IRA fairly quickly after the divorce, you could be left without enough money to retire.

Keep in mind that your IRA is likely a marital asset. Even if you started contributing to it before you got married, any contributions made since you got married may be considered a marital asset. The amount you withdraw, then, is not just yours—it’s also partially your spouse’s. You may have to give them a larger share of what remains to make up for what you took out.

Your IRA as a Marital Asset

In most cases, IRAs are considered marital assets. This means that they are subject to equitable distribution per Virginia law. Your retirement funds may be divided in a way that is fair, but not necessarily equal. For example, if one spouse has retirement accounts that are considered separate assets, they may receive a smaller share of the marital IRA. If one spouse has a massive inheritance they can live off of during retirement, they may not get as much of the shared IRA.

Even if your IRA is subject to division, you may be able to keep it. If your spouse is more motivated to keep other assets, you may be able to give them more from other assets in exchange for keeping your retirement accounts.

If you do agree to divvy up your retirement accounts as part of your divorce settlement, do not take matters into your own hands. Doing so could trigger financial penalties.

Transferring IRA Funds Properly

When you transfer retirement funds as part of a divorce, you should do so with a QDRO—a qualified domestic relations order. A QDRO allows you to transfer retirement accounts or funds without triggering immediate taxes and penalties. However, an IRA does not necessarily require a QDRO like employer-sponsored plans do. 

In some cases, simply outlining the terms of your IRA division in your divorce decree is enough. This isn’t an area where you want to take chances, though, so it’s best to discuss your path forward with your divorce attorney and a financial advisor.

It’s also worth your time to consult a financial advisor to plan for your financial future after divorce. Dividing your IRA can leave your retirement in serious danger. It’s important to come up with a plan to replenish your retirement account, and a financial advisor can help you develop a reasonable plan that will leave you with what you need for retirement.

Get the Help You Need to Navigate Divorce—Call Olmstead & Olmstead

The earlier you connect with an attorney in the divorce process, the sooner you can get started on the path to a fresh start. Don’t tackle this challenging time alone—let us help you prepare for your next chapter. Call us at 703-260-8752 or reach out online to set up a consultation with our team of Manassas, VA attorneys.

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