Washington couples who are splitting up should remember that the division of assets involves more than just who gets what. The tax implications associated with each financial decision can affect life long after the divorce is final.
Understanding tax implications
For many financial transactions during the end of the marriage, there are no additional taxes owed. However, after the divorce is final and the person who has kept the asset accesses the money, either by selling an asset or making withdrawals from a retirement account, for example, there might be tax implications.
When it comes to retirement accounts, the funds in a 401(k) can be divided without penalty or tax implications using a qualified domestic relations order as part of the divorce settlement. However, if certain rules and provisions are not met when it comes to withdrawal, taxes might be due on the distribution. For IRA accounts, a person can roll the funds they receive from their spouse’s IRA into their own IRA without any taxes being due.
Physical property and other assets
During the divorce settlement, couples negotiate who will keep each asset. In most cases, couples do not need to worry about immediate additional taxes. But the future taxes that might be owed if the asset is sold are a factor in the negotiation, as taxes can significantly affect the value of the asset and could impact the fairness of the settlement. Some of these considerations include:
- Keeping the family home and what that person will be taxed if they do sell it later
- Dividing investment accounts, mutual funds, stock and bonds
- Planning for Social Security benefits
The division of property during a divorce begins long before the negotiations start. Being aware of all assets, debts and tax situations for your family is key to prepare for this process and ensure you get a just award.