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How to divide retirement accounts in a divorce

On Behalf of | Dec 3, 2020 | Divorce |

As many as 50% of couples in Montana and across the United States will end their marriages. In many cases, retirement assets, such as 401(k) and IRA accounts, will need to be divided in a final divorce settlement. It is important to understand how to divide these accounts properly to minimize the possibility of triggering an unintended taxable event.

How to split an individual retirement account (IRA)

An IRA can generally be divided tax-free assuming that the transfer is related to divorce. Furthermore, the money must be transferred directly from the existing account to the newly created one. It is important to be aware that if you make use of the funds after they arrive in your account, you may have to pay an early withdrawal penalty.

Dividing other retirement accounts

If you have a qualified retirement plan, such as a 401(k), it will have to be split per the terms of a qualified domestic relations order (QDRO). The QDRO specifies that a transfer is taking place as part of a divorce settlement and that it shouldn’t be treated as a traditional withdrawal.

However, if you choose to use the funds after they reach their final destination, you could, again, be subject to an early withdrawal penalty and income taxes. It may be a good idea to consult with a financial adviser who may help you decide what to do with any retirement funds obtained in a divorce settlement.

A legal professional may help you obtain a significant share of joint assets in a final divorce settlement. These assets may include a portion of a retirement account or any other property that was acquired during the course of a marriage. A divorce may be finalized through mediation or a formal trial.