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How do you divide retirement accounts during divorce?

On Behalf of | May 28, 2024 | Divorce |

Dividing retirement accounts during a divorce can be complicated. There are various types of retirement accounts, including 401(k)s, IRAs and pensions. A 401(k) is an employer-sponsored plan, while an IRA is an individual retirement account. Pensions are often provided by government employers or large corporations.

Each type has different rules for division during a divorce.

Valuing retirement accounts

Determining the value of retirement accounts is important. The current account balance does not reflect the total value since it does not consider future growth. One must also consider the account’s projected growth and potential tax implications. Sometimes, a financial expert is necessary to evaluate the accounts accurately.

Qualified Domestic Relations Order

A Qualified Domestic Relations Order is often required to divide retirement accounts. A QDRO is a legal document that instructs the retirement plan administrator on how to distribute the funds. It ensures that the division complies with the plan’s rules and federal laws. Without a QDRO, the plan may not recognize the division, causing delays or issues in receiving the funds.

Tax implications

Dividing retirement accounts can have significant tax consequences. Withdrawals from these accounts are usually subject to taxes and penalties if taken before a certain age. These implications must be taken into account when dividing the accounts. Consulting a tax professional can help you avoid unexpected tax burdens.

Fair division strategies

There are various strategies to divide retirement accounts fairly. One approach is to split the accounts equally. Another method is to offset the value of the retirement accounts with other marital assets, like the family home. This approach can simplify the process and avoid the need for a QDRO.

Dividing retirement accounts during a divorce requires careful planning and understanding. Consulting legal and financial professionals can ensure a fair and smooth division.

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