Besides the home, one of the biggest assets to handle during a divorce is often retirement savings. There are many factors that should be taken into account, including the length of the marriage.

Your divorce decree should specify exactly how and when the retirement funds are split as well as how fees are paid and by whom. This is particularly important because the IRA may be invested in assets that will fluctuate in value.

Also, the decree may specify a fixed dollar amount to transfer or a percentage of the IRA. What is best will depend on your specific situation, and you may want to consult a financial advisor or accountant to protect your future.

Once you come to a decision about how much each spouse will receive, it is important that you transfer IRA assets correctly – or you could incur a hefty tax bill.

There are only two tax-free ways to transfer your IRA assets.

1. Retitling the IRA into the other’s spouse name.

If you are transferring the entire amount in one IRA to the other spouse, then you can simply change the name on the account. This requires a court order assigning ownership, and you’ll need to contact the account trustee. Since no funds were distributed, there is no tax liability.

2. Transfer IRA assets directly into an IRA owned by the other spouse.

If only part of the funds will be transferred to the other spouse, then the other spouse will have to set up a new IRA. Then the IRA owner can authorize a direct transfer, also known as a trustee-to-trustee transfer, from their account into the other spouse’s new IRA.

In this case, no reporting (such as Form 1099-R or 5498) is issued to the IRS. This is because the transaction is a transfer – not a distribution and rollover.

What NOT to Do When Splitting IRAs

It is important that you do NOT cash out or take a distribution from your IRA and then transfer it into an account first. Otherwise, you will be liable for taxes on the disbursement, as well as significant penalties if you have not yet reached retirement age.

If you feel uncertain about how to handle the IRA transfer, speak with your divorce attorney, financial advisor, and/or accountant. Taking proactive steps now to ensure everything is done correctly can save you a lot of money and headache in the long run.