Q: During separation but prior to divorce proceedings, can I liquidate some of a retirement account?
The account was created and funded while we were married. How do retirement accounts figure into things? What could the penalty be once we go to divorce court?
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- California
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- Answered
A:
In California, retirement accounts like 401(k)s, IRAs, and pensions that were contributed to during the marriage are generally considered community property, meaning they are subject to division during a divorce. However, liquidating or withdrawing funds from a retirement account prior to the divorce being finalized can have significant consequences.
Potential penalties and consequences:
1. Early withdrawal penalties: If you withdraw funds from a retirement account before reaching the required age (typically 59½), you may face early withdrawal penalties from the IRS, which can be as much as 10% of the amount withdrawn.
2. Income taxes: Withdrawals from tax-deferred retirement accounts are usually treated as taxable income, and you may owe both federal and state income taxes on the amount withdrawn.
3. Legal consequences: If you liquidate a portion of a retirement account without your spouse's consent or a court order, your spouse may claim that you have improperly disposed of community property. This could lead to a judge ruling in favor of your spouse when dividing assets or even holding you in contempt of court.
4. Reduced retirement savings: Withdrawing funds early will diminish the amount of money available to you in retirement.
It is generally advisable to wait until the divorce is finalized and the court has issued a qualified domestic relations order (QDRO) before making any changes to retirement accounts. A QDRO allows for the division of retirement assets between divorcing spouses without incurring early withdrawal penalties or taxes.
Consult with a family law attorney and a financial advisor to understand your options and the potential consequences of liquidating retirement accounts during the separation period in California.
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