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Divide retirement accounts during a divorce

Complex divorces can be a challenge to work through, but getting everything divided must be a priority. You have to work through all the assets and debts that you amassed during the course of your marriage. This includes retirement accounts, which have some special considerations.

The way that you handle the retirement accounts depends primarily on what type of account it is. If you have an individual retirement account, or IRA, you will use the transfer incident to the divorce process to get it divided. If you have other types of retirement accounts, such as a 403(b) or 401(k), you need to have a qualified domestic relations order, or QDRO.

What is a QDRO necessary?

A QDRO is a court document that lists an alternate payee for a retirement account. The order has to include contact information for that person, as well as the account holder. It must outline exactly how the funds will be divided. Once it is created and approved by the court, it will go to the plan administrator. That person must review it and approve or deny it. If it is approved, you will receive an estimate of when it will be completed. If it is denied, you will be told why and what steps to take to get it approved.

Why is this necessary?

You probably don't want to have early withdrawal penalties and taxes due because of dividing the retirement account. The QDRO prevents you from having to pay these since the only reason money is being taken out of the account is due to the divorce. Ultimately, it is a protective measure for both adults. Consulting your tax professional can help you to learn more about what your property division options mean for your taxes.

Do all divorces have a QDRO?

Sometimes, parties opt to work out a divorce settlement that doesn't involve the retirement accounts. This might be possible if both people have their own accounts that are relatively equal. In this case, each could keep their own and then divide up the other assets and debts.

You have to think about the long-term impacts of the decisions you make now. Some assets may be more of a financial burden than they originally appear. Make sure that you don't sacrifice stable accounts in exchange for them. Consider this, as well as your needs, when you decide how to handle every aspect of your divorce.

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