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How should retirement be split in a divorce?

When older couples decide to get a divorce, they may assume that the process will be a bit easier. After all, any children they had are likely grown, and thus they probably won’t have to determine any child custody or child support. But that doesn’t mean their divorce won’t have other kinds of difficult questions to answer. One that many people in North Carolina have to deal with is what to do with retirement accounts when splitting assets in divorce. The answer depends primarily on the type of the account.

401(k) versus pension versus IRA

Three of the most common types of retirement accounts are a 401(k), pension and an Individual Retirement Account. For a 401(k), the best action may be to obtain a qualified domestic relations order. A QDRO officially documents how a retirement asset may be split, whether that is by awarding the non-owning spouse an interest in the balance of the account or a portion of the payments when issued. It may be more challenging to split a pension as rules differ between employers and the value may not be evident the way it is with a 401(k).

A QDRO cannot be used to split an IRA, which must be divided by stipulations made in the divorce decree. Generally, the owner of the IRA will designate an agreed-upon percentage or amount for the other spouse’s IRA. If the recipient opts to cash out his or her portion of the IRA, the tax consequences may be significant, especially if early withdrawal applies.

Getting a professional is an investment for the future

The bottom line is that it will likely benefit both spouses to involve financial and legal professionals in the divorce process. In particular, working with a family law attorney here in North Carolina may be an investment well worth making. A knowledgeable attorney can ensure that all parties are treated with fairness with an eye to the future.