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Dividing a retirement account and avoiding mistakes

Dividing a 401(k) or a pension plan in a divorce can be costly for couples in Pennsylvania if they do not get a court order known as a qualified domestic relations order. With a QDRO, it is possible to make distributions from this type of retirement plan without having to pay penalties and taxes.

An attorney prepares the QDRO, and it must be approved by the plan's administrator. A couple should also review the document to ensure that it is consistent with the divorce decree. The document should also say whether the distribution will be rolled over into an IRA or directly distributed. If a person does receive a direct distribution, they will have to pay regular income taxes on the amount.

However, a direct distribution from an IRA could incur a penalty for early withdrawal along with income taxes. Dividing an IRA in a divorce does not require a QDRO, but the custodian will probably need a copy of the divorce agreement, and there will be paperwork to fill out. Taxes and penalties can be avoided by rolling the distribution into another IRA.

Recipients of retirement funds should be wary of agreeing to be removed as beneficiary if the divorce is not yet final. If the spouse dies while the divorce is still pending, the person might receive nothing from the account.

Retirement accounts are only one kind of property that may need to be divided when a couple divorces. Other property may include real estate, investments, valuable collections and even a business. These assets all present various complications as some may need to be appraised and sold, and these processes can take time. The couple might want to try to negotiate an agreement to divide property instead of going to court so that they remain in control of the final outcome.

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