Are there any penalties or taxes to be aware of in dividing a pension?

One of the key features of ERISA and all the statutes that govern the division of retirement assets is to protect the tax treatment of the retirement assets. Retirement assets are basically tax-deferred money. It’s money that you receive now or you put away now that you’re not taxed on and you’re not taxed on the growth on it as it sits in your account. That’s a big benefit of retirement accounts, but let’s talk about dividing an IRA.

You have to be divorced to divide an IRA, and usually you have to present your final divorce decree. There’s a form that needs to be filled out from the financial house Fidelity, Transamerica, whoever holds your IRA – your local bank – where you have to sign part of it and it has to be rolled over into your ex-spouse’s IRA. You can’t take the money out directly and pay him or her because then you’ll be taxed on the withdrawal.

That will be considered a withdrawal from your IRA, not a rollover, and you’ll be taxed – not your ex-spouse. Direct Rollover is a law of the land now. Direct Rollover is better. You just roll over from one to the other. You’re not taxed; they are not taxed. When you divide the pension by the special court orders that apply, there is no tax at the moment.

The orders are entered, but once you start drawing money out of a pension plan, it is taxed to you as income. This is whether you had been the employee or you’re the former spouse receiving it. Once you draw the money, it’s taxed as income. Once you draw the money out of an IRA when you retire, you’re taxed on the money, the growth, and the money itself.

It’s a traditional IRA. If you have a Roth IRA, the money that you’ve contributed you didn’t get a tax deduction for. When you take that money out, you’re not taxed, but when you take out the gross on it, you’re taxed on that. The financial houses have to calculate the tax on that.

Carolyn Grimes is a family lawyer at the law firm of Wade Grimes Friedman Sutter & Leischner PLLC in Alexandria, Virginia. To learn more about Grimes and her firm, visit www.oldtownlawyers.com.