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Divorce and division of retirement accounts

A qualified domestic relations order is a document that allows divorcing couples to split a 401(k) account or a pension plan without paying high taxes and penalties. Usually, an attorney will prepare a QDRO in accordance with a plan administrator’s instructions regarding the rules for the plan. A North Carolina couple should review a QDRO with their attorneys and make sure the order demonstrates the same intent outlined in the divorce agreement.

The QDRO should specify whether distributions are being made to a rollover IRA. If this is the case, there will be no taxes or penalties. A recipient can also receive a direct distribution. While a divorce provides an exception to the rule on making an early withdrawal, it will still be necessary to pay regular income tax on the distribution.

Both the QDRO and divorce decree should identify a percentage payment amount instead of using a dollar amount since the value of the account can fluctuate. Furthermore, recipients should not agree to being removed as the beneficiary on a 401(k) until the divorce is final. This ensures that if the spouse dies before the divorce is final, the other spouse still gets the assets.

In addition to one or more retirement accounts, a couple may have a number of other assets they need to divide up. These assets could include a home, vehicles and bank accounts. They might also have debts that need to be divided. The couple may want to try to work with their attorneys and negotiate an agreement for property division. This could be less expensive than going to court.