When dividing assets as part of the divorce process, it is important to do so properly to avoid costly tax consequences. For instance, it may be a good idea to have assets inside of a 401(k) plan rolled over from one spouse's account to the other. This is a non-taxable event and may be the easier way to transfer the money. If the spouse receiving the money wants to take it as cash, he or she could be liable for income tax and an early withdrawal penalty.
In the event that a 401(k) plan participant was allowed to make after-tax contributions, that basis should be shared by both parties. This makes it easier to capture the actual value of those contributions. New IRS rules may also make it possible to rollover those contributions into a Roth IRA, which is also funded with after-tax contributions.
Those who have an interest in a 401(k) plan should make sure that they get a pro-rata share of accrued contributions up to the date of the divorce. This is true regardless of when any contribution was actually made to the plan. In the event that assets inside of a retirement plan cannot be divided or are subject to taxes whenever a distribution is made, a divorce agreement should determine ahead of time how to deal with those taxes.
A person who is going through a high-net-worth divorce may want an attorney to assist with complex property division matters. If the two parties are unable to agree on this matter, the determination will be made by the court. Accordingly, the attorney may suggest that another round of negotiations may be advisable.