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How to Mishandle Retirement Plans in Divorce

Blog 2018 January How to Mishandle Retirement Plans in Divorce
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How to Mishandle Retirement Plans in Divorce

Posted By Stepniak & Park || 5-Jan-2018

Aside from the family home and vehicles, retirement plans (401k plans and defined benefits plans) are considered one of the significant source of assets in a marriage. It is important to properly handle these assets when divorce arises, since ignoring them or inadequately dividing them can result in substantial financial loss for one or both spouses. Understanding how to mishandle retirement plans in divorce can help you avoid these pitfalls and make a successful transition into the next chapter of life.

The following are common ways couples involved in divorce mishandle retirement plans:

  • Ignoring retirement assets. Typically couples avoid dividing their 401k or retirement assets due to the belief that the division process is too complex or the account balances are about the same. While it may make sense not to divide the retirement accounts based on the particular financial situation of a marriage, one or both spouses may not have the means to cover certain types of debt associated with divorce.
  • Failing to use a QDRO to divide retirement assets. Many people will try to divide their retirement assets on their own by withdrawing money to give it to the other spouse directly without using a QDRO. Unfortunately, dividing retirement this way makes the withdrawn portion taxable income added to the ordinary income for the year, resulting in a significant amount of income tax and possible penalties to the IRS.
  • Not protecting the retirement accounts prior to the finalization of divorce. If a divorce petition is filed without any temporary restraining orders (TRO) which prevent liquidation of retirement assets, then nothing can stop an account owner from clearing out the account. It’s imperative to submit a domestic relations order (DRO) in order to let the plan administrator know to place a hold on any distributions, as well as a TRO to prevent liquidation of financial assets.

For more information about handling retirement accounts involved in divorce, contact Law Offices of Robert Stepniak and request a free consultation with our Daytona Beach family lawyer.

Categories: Divorce

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