Potential problems with retirement accounts in DIY divorce

In Michigan and around the country, some couples who have made the decision to divorce forego legal counsel and try to handle much of the settlement of financial assets on their own, including the daunting task of dividing property and accounts. Retirement accounts and pension plans can be difficult to allocate without a properly executed legal agreement and can result in one or both parties owing significantly more in taxes than they should.

The early withdrawal tax penalty for an improperly executed do-it-yourself divorce could be as high as 10 percent of what is withdrawn from a retirement account, not to mention the tax rate of up to 39.6 percent. An adviser who is more versed in tax law could recommend a simple transfer into a new retirement account, avoiding any early withdrawal penalties or unnecessary income tax bills. Or, another simple solution would be for the lesser-earning spouse to cash out their retirement account, avoiding hefty tax fees.

The primary reason pension and retirement accounts pose such a significant problem when couples choose to split these assets on their own is that each pension plan or retirement account will come with its own set of unique rules. For example, some state pension plans do not even allow for a divorcing spouse to receive half of the asset once the divorcing spouse remarries. A good legal agreement would be able to address the unique set of rules that apply to each retirement account, lessening the financial impact.

Couples with significant financial resources who are going through divorce might benefit from seeking the counsel of a high asset divorce attorney who may be able to execute a proper appraisal of assets and assign a valuation that will be fair to both parties. The attorney may be helpful in working through complex asset division and helping to protect the financial future for everyone involved.