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Dividing a retirement account in a divorce

On Behalf of | Dec 23, 2022 | Divorce |

Under Indiana law, when a married couple divorces, they must divide any separate property from their marital property, and then divide the marital property in a way that meets standards of fairness under state guidelines.

None of this is easy, but some parts of the process are easier than others.

For instance, if the parties have a joint bank account together, they can withdraw it and divide the proceeds according to their settlement agreement. Negotiating how they split the account is the hard part, but actually withdrawing the money and dividing it is not hard.

For other types of assets, the property division process is a lot harder.

For instance, if the parties owned their family home, they will have to figure out how to divide it. If they both want to live somewhere new, they can sell the home and divide the proceeds. If one of them wants to keep the home, they will have to get it professionally appraised, and then one can buy out the other’s share.

Retirement accounts can be even trickier.

Penalty for early withdrawal

Whether they come in the form of an employer-sponsored 401(k) or some other format, most retirement accounts are based on the idea that they can gather interest tax-free if the owner does not withdraw the account until after they reach retirement age.

For many married couples, a retirement account represents a significant chunk of their total assets. They can’t just let it go during divorce. Both spouses were planning to use that money in their later years.

However, if they withdraw funds from the account, they will face significant tax penalties. They may also face penalties from the financial institution holding the account.

This presents a problem in divorce.

If the parties determine that the account is part of the marital property, then they will have to divide it, along with the rest of their property. But, if they have not yet reached retirement age, an early withdrawal could destroy the value of the account.

QDRO

The best way around this problem is through using a Qualified Domestic Relations Order, or QDRO. This is a court order that instructs a financial institution to pay part of a retirement account to another person without incurring significant penalties.

A QDRO applies only to certain types of retirement accounts, including 401(k) and 403(b) accounts.

Typically, the financial institution holding the account will divide the account between the original holder and the “alternate payee.” The institution then moves the alternate payee’s share into a new retirement account in their name.

Tread carefully

If you’re going through a divorce, you know how heartbreaking and painful the experience can be. no one can blame you for saying they just want to get it over with as quickly as possible. However, if you aren’t careful, you can end up losing valuable assets that you will need later on in life.

Attorneys help clients to protect their rights and the futures in divorce.

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