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Handling IRAs during divorce property division

On Behalf of | Jan 20, 2020 | Divorce, Divorce

In Virginia and across the country, the divorce rate is declining. However, there is one significant exception: Couples age 50 and up are actually more likely to divorce than they were in the past. This is important not only because it reflects changing social norms but also because of the financial effects of the end of a marriage. When people divorce later in life, they have fewer years to recover from the blow of property division. In many cases, retirement accounts are some of the largest assets held by the couple.

In addition to negotiating a fair settlement in the property division process, splitting retirement accounts comes with its own complexities. In most cases, retirement accounts are marital assets regardless of whose name is on the fund; both spouses may have assets subject to division, or the entire account may be held in one person’s name. When dividing an employment-based account like a pension plan or 401(k), specific rules must be followed. These qualified plans require a qualified domestic relations order or QDRO, a specialized court order directing specifically how the distribution is to take place.

Individual retirement accounts, or IRAs, do not require a QDRO; the divorce decree alone is sufficient to order a division. However, people may want to keep tax concerns and penalties in mind. Distributions from an IRA before the age of 59.5 are subject to an additional 10% penalty on top of regular income tax. While the divorce division itself does not incur a penalty, the recipient spouse must put the money in their own retirement account to avoid bearing an unexpected cost.

Dividing retirement plans can be one of the most significant parts of property division in a divorce. A family law attorney may help people to protect their assets and negotiate a responsible settlement.

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