Couples in North Carolina who are getting a divorce could run into complications if they need to divide a retirement account. There could be taxes and penalties if it not done correctly. For example, a couple needs a document known as a qualified domestic relations order, or QDRO, to split a 401(k) without paying taxes and penalties.
For one couple, failing to have a QDRO resulted in payments of $110,000 on a $250,000 withdrawal by the higher-earning spouse. The penalty for early distribution was $25,000, and the tax was $85,000. If the couple had obtained a QDRO and rolled the money into another retirement account, they would not have had to pay this.
A QDRO must be approved by the pension company. Preparing it is a complex process and mistakes can be expensive, so it should be done by someone who has financial experience. Another consideration with pension plans is that they may have a number of different rules that must be followed.
It may be necessary to look carefully into the couple’s finances to find out if there are old retirement accounts that have been forgotten about. Another option for a couple is to make a trade in which one person takes the retirement account and the other takes another asset.
If this is the case, a person may want to make sure that the assets are of roughly equal value. For example, there may be a tax on withdrawals from the retirement account. Alternately, a person might take the family home, but the cost of things such as maintenance, taxes and insurance should be taken into account. In a high-asset divorce, there may be additional items that need to be divided including complex investments, real estate and even a business.