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Be careful when dividing retirement accounts in divorce

Many divorce attorneys see their clients' eyes glaze over when they start talking about dividing up the couple's 401(k) and other retirement accounts. However, these assets represent years of hard-earned savings that you're counting on to help you be able to retire and live in comfort during your senior years. They may be the bulk of your assets, so you want to ensure that you receive your fair share in the divorce.

There are various types of retirement accounts, and each type is handled differently in divorce. If your spouse has a retirement plan through his or her employer in the form of a 401(k) or pension plan, to access part of that, you'll need a qualified domestic relations order (QDRO) for each plan in addition to your divorce agreement. A QDRO is required for the plan administrator to transfer your share of the funds as detailed in the agreement. People often have the funds transferred to a rollover individual retirement account (IRA) to avoid early withdrawal penalties and/or having to pay taxes on the money.

If you and your spouse only have IRAs, you don't need a QDRO. However, it's important to understand potential penalties and tax ramifications of getting part of your spouse's IRA. Generally a trustee-to-trustee transfer will help you avoid early withdrawal penalties.

Dividing IRA funds is usually less complicated than dividing workplace retirement plans. However, regardless of what type(s) of retirement accounts you and your spouse are dividing, it's essential to have a divorce attorney who is experienced in doing this. It's also wise to consult a financial advisor and tax professional to make sure that you're not unnecessarily paying penalties or taxes and that you're handling this important part of your next egg carefully.

Source: CNBC, "How to avoid mistakes dividing up 401(k) assets in divorce," Sarah O'Brien, March 07, 2018

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