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What rules apply to dividing different retirement accounts?

Division of retirement accounts is often a significant concern for couples in Kentucky going through a divorce. In fact, according to CNBC, a 2016 survey of matrimonial lawyers found that pensions and retirement accounts were number two on the list of top contentious issues in a divorce, second only to alimony. Further complicating the matter is the fact that the rules that govern the division of retirement accounts differ depending on what kind of account(s) you have. The divorce decree may specify the division of an individual retirement account, while a court must order the division of a workplace retirement plan, such as a 401(k).

You must be careful and ensure that you handle the division of your IRA properly, or you could end up paying a hefty price. If you simply withdraw the funds and hand them over to your ex-spouse, you could incur an early withdrawal penalty of 10 percent, depending on your age, as well as having to pay taxes on the amount that you withdraw. To divide an IRA properly and without penalty, you need to submit paperwork, including a copy of the divorce agreement that clearly spells out when the division is to occur and for what amount, to the custodian of the IRA, i.e., a financial institution.

If you have a workplace retirement plan, such as a pension or a 401(k), and your spouse is entitled to a part, he or she needs a court document called a qualified domestic relations order to legally access his or her share. A QDRO derives from the contents of a divorce decree, but it is an entirely separate document. Your spouse may choose to receive the funds directly or roll them over into an IRA, and the transfer will take place once the 401(k) administrator approves the QDRO.

The information in this article is not intended as legal advice but provided for educational purposes only. 

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