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Dividing Your Retirement Pension Plan in Divorce

Posted on in Property Division

Wheaton divorce lawyersAside from the family home, retirement accounts are typically one of the more valuable assets in a couple’s marital estate. When dealing with one in divorce, the valuation must be accurate and the division process must be exacting. Otherwise, the parties may be subject to lengthy delays, severe tax penalties, and a significant decrease in the overall value of their final settlement. Thankfully, all of these issues can be avoided, so long as the parties are educated about the process and have proper guidance from seasoned, competent financial and legal professionals. 

Not All Retirement Plans Are Divided in Divorce 

Though it is rare, it is possible for a retirement pension plan to be excluded from the marital estate. One example would be if the contributing party started the account prior to the marriage and has not made a contribution since that time. Contributing parties who wish to keep their retirement account intact may also choose to “buy out” their spouse by offering up other marital assets in lieu of a cut from the pension plan (i.e. trading the family home for the retirement plan). 

Qualified Domestic Relation Orders 

Qualified domestic relation orders, or QDROs, are used to divide “qualified” retirement plan assets between a contributing member and their ex-spouse. It is one of the few instances in which the plan can be divided without facing a tax penalty. However, a penalty may still ensue if the QDRO is not done, or if a mistake is made. For example, if you transfer funds directly to your spouse to help them out with money until they can get back on their feet, hefty tax penalties could ensue for you both. To avoid such matters, have a qualified team of legal and financial advisors on board before making any transfers or changes to your retirement plan. 

Dividing IRAs: Transfer Incidents

Despite common misconception, not all pension plans are divided using a QDRO. In fact, one of the more popular retirement pension plan, IRAs, are divided by a transfer incident. While the result of each process is about the same - each relieving parties from hefty tax penalties and possibly also early withdrawal penalties - the exact nuances are different. Most notably, legal and financial ownership of the account transfers to the recipient, so they become liable for any taxes that may be owed against the account, including those related to an early withdrawal. This may not always be the case in a QDRO-divided pension plan. 

Contact Our Wheaton Divorce Attorneys and Make the Most of Your Divorce Settlement 

If you expect a retirement plan to be included in your divorce (or if you want to see if it is eligible for exclusion), contact Davi Law Group, LLC. Our skilled DuPage County divorce lawyers are prepared to help you get the most out of your settlement, and we are committed to your best interests. Call 630-580-6373 to schedule your personalized consultation with our team today.

Source:

https://www.investopedia.com/articles/retirement/03/060403.asp

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