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How a divorce impacts your retirement accounts

On Behalf of | Oct 2, 2023 | Firm News |

Although there are many emotions involved in a divorce, legally speaking, sometimes a divorce is no more than a math problem. Property division is one of the main aspects of a divorce.

Property division in a Maryland divorce involves splitting your marital assets and debts in a fair and equitable manner. You may worry about splitting assets such as your retirement accounts, especially if you have worked for many years and have built up a high retirement account balance.

Retirement accounts and taxes

Dividing retirement accounts in a divorce is different than dividing other assets because you must consider potential tax implications. You probably know that you are taxed on withdrawals from your retirement accounts.

If your spouse is receiving a portion of your retirement accounts as part of your divorce, you could be subject to these tax penalties. Keep this in mind during the property division process to make sure you are getting a fair deal.

Qualified domestic relations orders

A common way to avoid these tax implications is to split the retirement accounts using a qualified domestic relations order (“QDRO”). This is a document specifically designed to handle retirement account distributions in a divorce.Preparing a QDRO is often based on specific requirements from your retirement account administrator. It is important that you learn these requirements and ensure your QDRO is properly prepared to avoid any penalties.

Withdrawing or transferring

Your spouse can choose to receive their portion of your retirement account as a lump sum withdrawal or have it transferred into their own retirement account. If you complete the transaction with a QDRO you typically should not face any tax penalties, but your spouse might be subject to state or federal tax for receiving the distribution.

This is a simple breakdown of how retirement accounts are treated in a divorce. There may be additional requirements or considerations based on the type of retirement account and the factors a court uses when dividing marital property.

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