Florida residents who are going through the divorce process should be aware of some costly mistakes that are often made before a divorce is finalized. It is important to anticipate the tax liabilities that may be incurred when a portion of a retirement plan is transferred pursuant to a qualified domestic relations order. Any time the former spouse takes a portion of his or her benefit in cash, there is the potential for an early distribution penalty as well as income tax liability.
It is also important to have a clear plan for dividing those plans. One method favors the plan participant while the other favors the former spouse. Another mistake is to avoid dividing the tax basis for after-tax contributions. The best strategy for fair distribution is to define the former spouse’s benefit to include a pro rata portion of the tax basis. When employers make annual contributions to a retirement plan, the former spouse’s plan interests should be defined to include a pro rata share as well.
When dealing with non-divisible, non-qualified retirement plans, there should be an allocation formula for future tax consequences. Distributions from non-qualified plans result in tax penalties, and without a previously agreed upon plan to ensure fair distribution of those consequences, one person could end up with all of the responsibility.
People who are facing the end of a marriage may benefit from consulting a divorce attorney to ensure that they are not making any of these costly financial mistakes. The attorney can often provide assistance with the property division process, which can be crucial where there are complex assets held by the couple.