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Qualified Domestic Relations Orders: Your Retirement Accounts and Your Divorce

When it comes to splitting up retirement accounts, not all accounts are created equal. For one thing, different accounts come with different tax consequences; even if two accounts have the same amount in funds, tax penalties can quickly make things unequal. While any facet of property division can be a complex matter, dividing retirement accounts can be especially complicated. One thing about this division is certain: how retirement accounts are split up can make all the difference in your long-term financial future. Here then are three things to consider when it comes to getting a fair split of your retirement funds.

Inventory Your Investments

You should look at your checking and savings, your brokerage accounts, stocks and bonds, and of course, retirement accounts. Don't forget insurance, employment benefits, pensions, vested stock options, etc. Once you have the complete financial picture, you can start getting specific about what you will need for the future as well as what you will need for the next several months. The help of a financial expert can be invaluable for this step. You will have to take into account the true value of each of these holdings. For instance, a Roth IRA can be worth much more than a 401(k) of the same amount, as a 401(k) plan represents pre-tax dollars, while a Roth IRA usually does not carry any tax penalties when funds are withdrawn.

Keeping Your Own Accounts vs. the Many Considerations of Splitting Plans

If you need to split up your retirement accounts, you need to follow procedure to the letter. For instance, some IRA plans mandate that the account number and other details be named in the divorce decree. There's also timing to consider; if you transfer funds prematurely, you could still get hit with the 10 percent tax penalty. Then there are employer retirement plans, like your pension or 401(k). If you are going to split these plans, then you need to get a Qualified Domestic Relations Order (QDRO), a court order. You need this to escape the tax penalty for early withdrawal. You could also bypass this penalty if the funds are getting transferred to a different type of plan. You can include this QDRO in the divorce decree itself, else you need to obtain this order as soon as possible.

While your divorce settlement can include a stipulation on how funds will be transferred from spouse's account to the other and escape an instant penalty, there can sometimes be the simpler option of you and your spouse keeping the plans that are under your respective names. But that may not always be fair. With the help of legal professionals and financial experts, the complicated process of splitting up retirement accounts can be made that much simpler, and you can reap the long-term benefits. And the decision of whether to split or not can be made simpler with a professional's help as well, as a divorce attorney can help you envision what it would mean to simply hold onto your own plans, as compared to what getting a transfer from your ex's accounts would mean.

What It Takes to Be Thorough

One misstep in this process could cost a great deal. For instance, even if you have your QDRO, you cannot transfer funds until the plan administrator gives approval, not if you want to avoid the tax penalty. You also need to ensure that your beneficiaries are all updated.

Of course, making plans for this division is one thing. It can take legal skill to make these plans a reality. When you need to be aware of your legal rights and how you can guard them in a divorce, call the Meyers Law Group, P.C. today. Find out a divorce lawyer in Long Island can protect your future!