DIVIDING A RETIREMENT ACCOUNT - HOW TO DIVIDE IT AND THE ALTERNATIVES

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You’ve worked your whole life to save for your future. Now that divorce is inevitable, it’s important to understand how your marital dissolution will impact your retirement accounts. Any retirement accounts or other investments that have accrued during the marriage are generally considered marital property. They will be subject to “equitable distribution” during the divorce. Although equitable does not mean equal, it often does. This means that your retirement account will be subject to distribution. However, it’s usually not preferable to simply withdraw half of the account like you would a regular bank account, without incurring penalties. Moreover, sometimes a pension or retirement will not vest until sometime after the entry of the divorce. This means that it is probably impossible to withdraw the other spouse’s equitable share at the time of the divorce. IRAs and 401(k) plans have complex regulations which prohibit liquidating funds without incurring penalties and tax consequences.

The solution is a legal document called a “Qualified Domestic Relations Order”, or a QDRO for short. This document will be drafted by your attorney or a QDRO preparation serviceat the end of your divorce and sent to the bank pension administrator for approval. The QDRO will direct the bank to divide the account into two accounts, placing your spouse’s share into the new account. This allows the accounts to be divided without incurring tax or other financial penalties associated with liquidating a retirement account. Your attorney may coordinate this decision with a tax professional or your financial advisor to make sure that the division is in your best interest.

Although QDROs are used quite often, there are alternatives. The goal in equitable distribution is to reach a fair settlement for both parties. This does not necessarily mean both parties take exactly half of each item. Instead, to avoid dividing large assets such as a retirement account, it is possible to give the other spouse a larger share of a different asset. For example, if you want to keep your retirement intact, it may be advisable to give the other spouse a larger share of the equity from the marital residence to make up for the share of your retirement. This will depend on the specific circumstances of your case and the ultimate goals that are important to you in settlement.

Untangling the financial ties between you and your spouse can be complex and overwhelming. You need an attorney who is knowledgeable about the issues and the alternatives. Call us today at (732) 479-4711 to talk about your retirement and your future.

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