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Tips to properly allocate a retirement plan in your divorce

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When you plan to spend the rest of your life with your spouse, it is very common to develop a joint retirement plan. In the case, however, that your marriage fails, you are left to separate your shared assets, including your retirement.

Consider these tips for properly allocating a retirement plan in your divorce.

Understand marital property.

A common misconception among divorcing couples is that a retirement plan that is owned by one spouse will remain solely with that person. This is not true in many cases. All income and assets acquired by either party during the marriage are usually classified as marital property. This includes the following:

  • 401(k)s
  • Pension plans
  • IRAs
  • Retirement plans
  • Deferred compensation
  • Stock options

In most cases, any financial gains that are acquired during a marriage from separately owned property are also considered marital property and are therefore eligible to be divided. This would include accrued value on investments and the increase in value of paintings or other art pieces.

Utilize a QDRO.

During a divorce some couples may choose to withdraw their retirement funds in order to split them and set up their own accounts. This can result in early withdrawal penalties and taxes. An option to avoid this is a qualified domestic relations order, or QDRO. Simply stated, a QDRO is a court order that outlines how the retirement plan benefits are to be paid to a nonemployee spouse. The funds may then be separated, withdrawn and deposited into the spouse's separate retirement account without penalty. However, certain governmental retirement plans have their own rules and regulations regarding division during divorce, so if you are looking to split one of those plans it is wise to check and see what options are available.

Make it a transfer.

Another possible option is for the spouse who does not have the retirement plan in their name to open a separate retirement account and have their share of the retirement funds sent to the new account as a transfer. This is another option to help avoid early withdrawal fees and tax penalties. However, it is critical that the transaction instructions be worded properly and meet all guidelines set by the IRA account custodian, the judge and state law.

As you prepare to separate your retirement funds, it is imperative that you consider all avenues, along with the benefits and possible consequences of each choice. When you know what you are getting into from the beginning, you can make an educated decision. Consult with your local family law attorney to make sure that you are fully abreast of your best opportunities.

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