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Errors in dividing retirement accounts can be costly

On Behalf of | Mar 13, 2018 | Family Law |

Pennsylvania couples who are getting a divorce might have a retirement account they need to divide. Distributions can be made from a retirement account during a divorce without incurring penalties for early withdrawals or taxes, but they must be done according to certain regulations.

For a pension plan or a 401(k), a couple will need a document called a qualified domestic relations order that should be prepared by an attorney. It must be reviewed and approved by a plan administrator. Its contents should be consistent with the portion of the divorce agreement that addresses the retirement account, and it should say whether the distribution will be rolled into an IRA. This will exempt the recipient from both taxes and penalties. A direct distribution is also an option. The recipient will have to pay regular income taxes, however.

For an IRA, it is just necessary to adhere to the regulations of the financial institution where the account is kept and to roll the distribution over to another IRA. A QDRO is not necessary. Unlike with a 401(k), if the person decides to take the distribution directly, penalties are assessed as well as taxes.

There are other types of property that may need to be divided in a divorce as well. People might want to talk to an attorney about finances and how the divorce might affect them. A divorce can sometimes lead to financial struggles, and it may be important to a person’s financial stability to get part of a retirement account and other assets.

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