When you are getting a divorce, your main concerns are probably giving up possessions and figuring out custody of your children. Retirement accounts are probably not one of the main things you are stressing out about. However, the nest egg may represent a significant portion of your marital money.
These assets are worth fighting for, but you must approach them properly. If you do not divide retirement accounts correctly, you may get hit with hefty penalties and taxes. Here is a quick guide for splitting workplace plans and individual accounts.
If your spouse has a pension plan or 401(k) from his or her employer, the only way you can get your fair share of it is by getting a qualified domestic relations order, also known as a QDRO. According to The New York Times, a QDRO should directly reflect the divorce decree. Depending on your preferences, you may choose to transfer the money into a rollover IRA or simply get it directly.
You and your lawyer should contact the plan administrator and carefully review the QDRO before submitting the document to the court. If you do not pay close attention to the details of the QDRO, a costly mistake may occur.
You do not need a QDRO to divide a Roth or traditional IRA, but a false step here could also lead to penalties. One of the most important things to know is that you must conduct a trustee-to-trustee transfer. If you and your spouse try to do it on your own, there will likely be early withdrawal penalties and income taxes.
When it comes to dividing assets, do not overlook the importance of retirement accounts. If you are trying to get a piece of retirement plans from your spouse, make sure you follow the advice of your lawyer and the rules of each plan to avoid penalties.