let expert draw up forms to avoid taxes

            Posted on November 13, 2016 

Let expert draw up forms to avoid taxes

Q.   I’m 66 years old. After years of work and marriage, I’m now doing two things I’ve wanted to do for years: retiring and divorcing.

I’ve got a regular IRA, a profit sharing plan at work, a 401(k), and a Roth IRA. My wife will get half the total value.

What do I need to know before I flick the switch?

A.   No matter what your age, the best way to divide everything except the Roth IRA is to keep the assets in the same kind of account. All these transfers, if done correctly, will be tax-free, with no penalties.

So, for a regular IRA, most providers - like Vanguard, Fidelity, T. Rowe Price - have their own forms. You and your wife simply sign forms needed to transfer half of what is your account into what will be your wife’s new “rollover IRA” account.

In order to make a tax-free transfer of half the assets in your retirement and 401(k) accounts, you need to sign a Form called a “Domestic Relations Order”. Each plan probably has slightly different requirements for its form. In my experience, the least expensive way to achieve those divisions is to hire an expert to prepare the DRO.

Once you’ve signed two forms for each account, you or your lawyer need to file a motion in the probate court asking the judge to sign an order requiring the transfer. One copy of DRO form is retained in the court’s file. You send each plan administrator a certified copy of the Judge’s Order and one signed form. Once the plan administrator accepts that signed from, you have what is called a Qualified Domestic Relations Order or a QDRO.

The plan administrator will transfer half the then-value of each account into a new account in your wife’s name. All this complies with the Federal Law called the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.

Because money deposited into the Roth was already taxed, you can make tax-free withdrawals of principal. Once that Roth has been open for five years and, since you’re over 59 ½ years old, all the money, including the increased value of your investments, is tax free! You can equalize by withdrawing half the value and handing that money to your wife.

Of course you would only make these transfers after you two have signed a separation agreement and appeared before a judge who approves the agreement and enters a judgment of divorce.