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Avoiding penalties with retirement account division in divorce

Early withdrawal of retirement funds from any tax-sheltered account typically results in a tax penalty. However, there are ways around this during a divorce in Pennsylvania. Current and former federal workers may have a Thrift Savings Plan, which is treated differently from an IRA, 401(k) and other private sector accounts. After a couple or the court decides to divide funds stored in a TSP, certain language will have to be included in the final settlement.

There is no national law forcing division of retirement assets, and couples in a high-asset divorce may choose to trade interests in real estate and various accounts instead of splitting everything right down the middle. If the court or the couple does decide to divide a TSP, they must establish a Retirement Benefits Court Order in the settlement to avoid a 10 percent tax penalty.

The RBCO works similarly to the Qualified Domestic Relations Order. With the QDRO, the tax burden is swapped from the one withdrawing funds from retirement accounts to the one who gains property interests in the assets. The former spouse then must either rollover funds into another retirement account or pay taxes on the withdrawal. The language of an RBCO can be included in a QDRO to simplify the paperwork of complex asset division.

Couples attempting to navigate the divorce process alone may save a few dollars on the front end, but they could end up paying all that was saved and more on taxes in the months following the divorce. This is especially true during a high-asset divorce where disclosure and international assets are issues. An attorney may be able to offer advice on options for splitting up property interests while protecting as much of the original assets as possible from tax requirements.

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