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Splitting Retirement in Divorce Can Lead to Big Tax Headaches - What You Need to Know

Posted on in Divorce

Of all the assets that couples possess, retirement accounts are often one of the largest. They are also one of the most difficult to divide. Do it incorrectly and you and your spouse stand to lose a significant amount of your nest egg - and not just immediately. Improper division of a retirement account can also lead to major tax headaches. The following information can help you understand some of the most common pitfalls of retirement asset division in divorce, and how you may be able to avoid them.

Each Type of Plan Has Its Own Rules

One of the most important things to understand is that each type of plan has its own set of rules. For example, with an IRA, the division should be treated as a transfer "incident to divorce." Failure to label it this way can result in tax penalties for withdrawing early. Some plans need a QDRO to transfer assets from one spouse to the other, and certain qualified plans have limited flexibility when it comes to changing your beneficiaries (which you should always do after a divorce has been finalized). An experienced divorce lawyer can help you understand the particulars of your plan.

Avoid Withdrawing if You Can

Another big mistake that couples make with their retirement accounts in divorce is they close it out or withdraw from it to fund their divorce, or their life after the divorce. Make no mistake: this is a short-term gain with potentially long-term consequences. Not only is this account still considered a marital asset (which may cost you in other areas of your asset division), you can be subject to tax penalties for withdrawing it early. In short, avoid withdrawing from your retirement account, if you can.

Transferring of the Plan May Not Be Required

While there are some situations that may require a transfer of the retirement account, not all do. Some couples may be able to come to an agreement in which one spouse keeps the entirety (or majority) of the retirement account and the other takes other assets that may be more liquid, easier to transfer, or potentially more sentimental or practical in value. Of course, every divorce and couple is different, and things can change as negotiations progress, but an attorney can help advise you on your options.

Contact Our Wheaton Divorce Lawyers

At The Stogsdill Law Firm, P.C., we offer personalized and attentive services to suit your needs. Seasoned and dedicated, our Wheaton divorce lawyers will aggressively pursue the most positive outcome for your situation. We protect your interests and fight for your financial future. Learn more about how we can help with your case. Call 630-462-9500 and schedule a consultation today.



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