A Roth IRA is one way for people to set aside money for their retirement years. They make tax-deferred contributions while working and then take distributions from the account after they retire. This allows them to reduce the taxes they pay while supplementing their future standard of living.
Provided that they wait long enough to make withdrawals, they can avoid penalties and can minimize what taxes they pay due to the low-income level people usually have during retirement. A Roth IRA can be a source of comfort and stability during retirement years, but it can also be a source of conflict when married couples divorce. Typically, any contributions made during the marriage are theoretically subject to division when people divorce even if the account is in the name of only one spouse.
Spouses can arrange for a transfer
The first step for addressing a Roth IRA is to establish the marital portion of the account. Then, the spouses may need to negotiate how to address the account. They might split the marital balance evenly or in a way that reflects other property division agreements, such as who keeps the marital home. Provided that both spouses have a Roth IRA account in their own names, it is possible to arrange for the distribution of funds from one account to the other without immediate taxes or penalties. However, if either spouse actually withdraws funds before the appropriate age, then a 10% penalty and taxes may apply.
Spouses can avoid dividing the account
It is actually quite common for those who have funded Roth IRAs to make every conceivable effort to avoid splitting that account when they divorce. After determining the marital portion of the account, the spouses can negotiate an arrangement in which one of them keeps the full balance of the account while the other receives marital assets worth an equivalent amount. This approach can eliminate the possibility of penalties and taxes while simultaneously ensuring the retirement comfort of the spouse who retains the account.
Understanding how to address different assets during a complex divorce can be beneficial for those worried about the financial implications of divorce. Spouses who properly handle retirement savings and other valuable resources can use those resources to rebuild their lives after divorce.