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Divorce Law

How Retirement Accounts Are Divided in a Divorce

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By Lonnie Nelson
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How are retirement accounts divided in a divorce

One of the biggest challenges of a divorce is determining how to divide your assets. Especially when you have retirement accounts such as IRAs, pensions and 401(k)s.

Each account type has its own rules and procedures to avoid taxes and penalties when dividing them during the divorce. Typically, these include a Qualified Domestic Relations Order (QDRO) for 401(k)s and a court order for IRAs.

IRAs

Retirement accounts are typically among the most valuable assets in a divorce, and it’s often necessary to negotiate how they will be divided. A proper division can make a big difference in the financial future of both parties and can help a judge make an accurate property settlement award.

In most cases, IRAs will be separated in a divorce by executing a Qualified Domestic Relations Order (QDRO). A QDRO is a court order that directs an account custodian to separate the funds according to the terms of the decree.

However, dividing IRAs can be difficult for both spouses because it is a complex issue that requires careful consideration. A knowledgeable attorney can ensure that the division is made properly and will be consistent with your financial goals.

A qualified Georgia divorce attorney can also assist with determining the value of a retirement account as part of the property valuation process. Using this information, a judge will be able to divide the account appropriately – 50/50 in community property states and more equitably in equitable distribution states.

401(k)s

Divorcing couples usually struggle with how to divide retirement accounts, such as 401(k)s. This can be particularly problematic if one spouse started contributing to the account before the marriage.

Generally, the part of a 401(k) that a person contributed before the marriage is considered separate property, while any contributions made during the marriage are considered marital assets.

As a result, the first step in dividing a 401(k) is to calculate how much of its value is marital property.

This can be a complex process, especially when taxes are involved.

It is usually in a divorcee’s best interest to work with their divorce lawyer and financial advisor to come up with an amicable plan that will benefit both parties. This can help avoid the pitfalls of tax penalties and other fees.

Pensions

Retirement accounts are a significant portion of many people’s finances, and dividing these assets is one of the most important aspects of property division in a divorce. Unfortunately, there are a lot of rules and regulations that must be followed in order to divide them properly.

Pensions, in particular, are a difficult type of asset to divide because they can be quite complicated. There are many different rules and laws that need to be followed in order to divide a pension successfully, so it is advisable to seek legal counsel from an attorney to ensure that the proper procedures are being followed.

The first thing to do when dividing retirement accounts is to make sure that you file the correct paperwork with the proper financial institutions. This can help prevent unnecessary complications and problems during the divorce process. Most financial institutions require that the parties submit a form called “transfer incident to divorce” along with a copy of the divorce decree.

Health Savings Accounts (HSAs)

Health savings accounts (HSAs) are a popular way to pay for qualified medical expenses. They’re also a great place to invest for retirement.

HSAs let you contribute funds from your paycheck tax-free. Funds can be used to pay for qualified medical expenses, save for retirement, and even invest in mutual funds.

The contribution limit is based on the type of high deductible health plan coverage you have. If you have a family plan, both spouses can contribute up to $7,300 annually in 2021; $7,750 in 2023.

If you’re going through a divorce, it’s important to know how your HSA can be divided between you and your former spouse. If you have children, the former spouse can use your HSA to pay for their qualifying expenses without affecting the child’s eligibility for the tax credit.

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