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Dividing retirement assets during a divorce

Retirement assets may comprise one of the largest liquid assets during divorce in Pennsylvania. Incorrect property division can cause tax and other financial problems.

Taxation may have the largest impact on the distribution of this asset. For example, the unintentional distribution of a retirement account can cause tax penalties.

When dividing an IRA, the transfer should be classified as a "transfer that is incident to the divorce." If the transfer is not identified as being incident to divorce, both spouses face early withdrawal penalties. In addition, the transfer should be completed within one year of settlement because the IRS may review any transfer occurring after one year.

The IRA custodians, the judge and court must approve these instructions. Otherwise, any amount sent to a former spouse may be taxed as ordinary income.

A qualified domestic relations order (QDRO) should also be issued when a 401(k), defined benefit plan, a pension plan or other qualified plan is divided. A QDRO, like a transfer incident to divorce, may be a tax-free transaction, if it is reported appropriately to the IRA custodian and the court.

A receiving spouse may add this asset to an IRA or qualified plan. And, taxes or penalties may be imposed if the transfer is not clearly defined from a qualified plan as a QDRO.

Beneficiaries should be changed after an asset is transferred. A qualified plan provides less options for designated beneficiaries. If a spouse does not change a beneficiary designation in a 401(k) plan, the assets are transferred to a former spouse, even if the will contains a different beneficiary.

However, a spouse does not automatically receive beneficiary rights from an IRA. The IRA beneficiary designation form should be updated when a former spouse did not take a claim to retirement assets.

Distribution of assets is complex and has long-lasting consequences. A lawyer can help a spouse face these types of divorce legal issues and obtain a fair and just decree.

Source: Forbes, "Divorcing? How to split up retirement nest eggs," Duncan Rolph, Nov. 23, 2016

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