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How can dividing an IRA result in unequal property division?

On Behalf of | Mar 30, 2023 | Divorce

The state of Louisiana is a community property state. This means any property you have acquired during your marriage that is not separate property is subject to a 50-50 split with your spouse in divorce. This includes money you have placed in a retirement account such as a tax-deferred IRA.

As you determine how to split your property with your spouse, you should know that dividing your traditional IRA might not yield a truly equal division.

How traditional IRAs work

You make contributions into a simple IRA until you reach the age of 59 and a half. The IRS explains that by this point, you can withdraw money from the IRA without incurring a tax penalty. You do not pay taxes on IRA contributions because the law allows you to defer your taxes until you liquidate your IRA funds.

The problem with IRAs in divorce

According to CNBC, an easy mistake to make is to assume that dividing your IRA and a bank account by the same amounts will result in you having as much as your ex. The problem is that the amount in your bank account is not subject to taxation like your IRA is.

While $30,000 in your bank account remains $30,000, the same amount in your traditional IRA does not stay the same because you will have to pay taxes on it later after withdrawing it. So if your spouse receives $30,000 from a bank account while you keep the same amount in an IRA, you likely will end up with less money due to taxes.

You might consider a financial forecast of your retirement accounts and tax thresholds. You should learn whether or not your property division will hinder your retirement.

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