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Retirement accounts and divorce

Some Ohio couples that get a divorce might need to divide a retirement account. There are regulations that govern how these accounts are taxed and penalized during withdrawal that must be observed.

Retirement accounts that are known as "qualified plans," including 401(k)s, will incur a tax and a penalty if a person takes a portion out of the retirement account to give to a spouse as part of a divorce settlement. The tax and penalty can add up to a significant part of the withdrawal. This can be prevented if the couple gets a document known as a qualified domestic relations order.

IRAs are treated differently. A couple might have a QDRO, but it is not required to avoid tax. However, it will not prevent a penalty. There is a 10 percent penalty for most distributions that happen before a person reaches the age of 59½.

Regulations for dividing retirement accounts or pensions should be reviewed to ensure they are properly followed. A qualified domestic relation order can be costly to prepare, but not having it can be far more expensive. In some cases, a couple might decide it makes more sense to trade assets rather than go through the process and expense of dividing a retirement account. For example, one person might keep the home or a bank account. However, in assessing the value of these accounts for the purposes of property division, it is important to make certain that the values of these assets are accurately calculated. A bank account may be a more liquid asset than a retirement account that penalizes a person for making withdrawals if he or she is below a certain age. The value of a home should be assessed with an eye to costs, such as insurance, maintenance, taxes and utilities, on a single income.

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