Do I Need to Work with A Divorce Attorney That Offers Tax Advice as Well?
Forbes recently published an article on the importance of getting divorce, retirement accounts, and taxes right; specifically, what can happen when you and/or your divorce attorney fail to get ‘specific’ enough when it comes to how particular funds are going to be transferred in a divorce settlement. The article highlights the fact that distribution schemes can be just as important as everything else that gets addressed in the settlement, as highlighted by this one divorcee’s story:
One Divorcee’s Story
The story, as detailed by Forbes, is as follows: One spouse reached a settlement agreement with their ex, whereby she was required to pay him $10,000 from her retirement account in exchange for his payment to her of liquidated retirement proceeds. She proceeded to move the funds into a temporary IRA. He then withdrew these funds within one week of the transfer and closed the account, while being nowhere close in age to 59 ½.
When individuals withdraw from accounts like these, the relevant financial institutions issue a form 1099-R, Distribution from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Still, thinking that these were simply funds that he was due from his divorce, he failed to report the withdrawal, and the IRS sent a notice of deficiency, while also assessing a 10 percent early-withdrawal tax under the tax code.
It is important to note that there is an exception to the tax code for transfers that are part of properly settlements related to divorce, however, in order to fall under this exception, a distribution must be made under a qualified domestic relations order (QDRO). In failing to obtain one in this case, he argued that the transaction should be disregarded by the IRS as though his ex-wife had simply paid him directly in cash. This argument was, of course, unsuccessful.
What Should Have Been Done Differently
There are a number of options available to those getting divorced that allows them to avoid a disaster like this: For one, in order to avoid being assessed a penalty on any retirement account like an IRA, it is best to wait until you turn age 59 ½. However, if you do not want to or cannot wait, you simply have to negotiate a cash payment or spell out the terms of a transfer in a QDRO in the divorce settlement. And all of this has to be taken into account during the drafting stage, not after.
Choosing The Right Attorney Makes All the Difference in The World
This story highlights why it is so important to work with a family law attorney who is familiar with basic tax code issues like these that are applicable in divorces. Without this knowledge, you could very well end up in hot water when it comes to a myriad of tax issues; not just this one.
To find out about family law services here in Florida that include what is best for you in terms of your divorce and taxes, contact our Orlando divorce attorneys at Arwani Law Firm, PLLC today.