Splitting up assets in a divorce is not as simple as simply divvying everything up 50-50. First, Ohio is an “equitable distribution” state meaning that, if left up to the court, the judge will divide assets based on fairness, even if this does not result in an exact 50-50 split. Second, two assets that may at first glance seem to have an equal value may actually not be so even as they seem.
Cash vs. tangible assets
Cash, homes, automobiles and other assets are often on the table in the property division process. For example, one spouse may receive the family home in the property division process and the other spouse may receive cash of an equal value. However, once that home is sold, it may be subject to the capital gains tax, which the cash would not be. In such situations, it may be more appropriate to subtract these future taxes from the value of the asset to ensure distribution is fair.
When it comes to retirement accounts and property division, it is not as simple as withdrawing 50% of your 401(k) and giving it to your spouse. If this approach is taken, it will lead to a 20% tax withholding, lowering the value of the distribution. Moreover, if the accountholder is under age 59.5, they will be hit with a 10% penalty for withdrawing funds from their 401(k) early, again lowering the value of the distribution.
To avoid these scenarios, you need an attorney to execute a qualified domestic relations order (QDRO), which is a separate legal instrument from your divorce decree, even though it is based on it and must be approved by the court. In the QDRO, the transfer can be a trustee-to-trustee transfer to a rollover IRA, which will not be subject to tax for either party.
Not all assets are created equal
As you can see, not all assets are created equal, even if they may look like it on their face. The value of an asset should be adjusted based on any applicable taxes and penalties. This post does not contain legal advice. Those in Dayton who have further questions about property division and divorce may want to consult a family law attorney for further information.