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Divorce and the division of retirement accounts

On Behalf of | Mar 12, 2018 | High Asset Divorce |

For many Pennsylvania couples going through divorce, it’s necessary to split retirement accounts. Taking an early distribution from a retirement account usually results in having to pay taxes and penalties. In the event of a divorce, however, this can be avoided if the couple completes the proper paperwork and handles the distribution correctly.

With an IRA, this process is fairly straightforward. The financial institution will probably need a copy of the divorce decree and have its own paperwork to be completed. As long as the distribution is rolled into another IRA, there should not be taxes and penalties.

A pension plan or a 401(k) requires a qualified domestic relations order. This court order, which should be prepared by a lawyer, has to be accepted by the plan administrator. Among the information that should be included in the document is whether the distribution will be into a rollover IRA. A recipient can take a direct distribution on a 401(k) without having to pay a penalty; although, it will still be necessary to pay regular income tax on the distribution.

A soon-to-be ex should remain as a beneficiary on their spouse’s retirement account until after the divorce is final. Being removed beforehand can mean that if the account holder dies before the divorce, the spouse receives nothing.

A retirement account is likely to be one of a number of valuable assets that must be divided in a high-asset divorce. The couple might also have real estate or a business to divide. Property division can be a time-consuming process, but the couple may still prefer to negotiate an agreement instead of going before a judge. A negotiation may give them more control over the final divorce decree.