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Dividing retirement accounts in a divorce

One of the complexities many people face as part of a divorce is dividing retirement accounts. Since New Jersey is not a community property state, assets are supposed to be divided equitably, meaning they will not necessarily be split 50/50. There are several considerations to keep in mind when dividing retirement funds.

Dividing an IRA

The right paperwork needs to be in place to avoid taxes and penalties when retirement accounts are divided as part of a divorce. For an IRA, there are two elements that are necessary. The first is a property settlement agreement or divorce decree that divides the IRA. The other is that the funds need to be rolled into another IRA. Dividing an IRA in this situation is called a “transfer incident to divorce,” and it is critical that the correct language is used.

401(k)s and other retirement accounts

There are different requirements for other types of retirement accounts. For example, for a 401(k), is it necessary to have what is called a qualified domestic relations order. The person who is receiving funds because of a divorce should decide whether to roll it into an IRA or take the funds directly. If the money goes into the IRA first, the person will be required to pay a penalty if younger than 59 1/2.

There are a number of financial issues to take into account when deciding how to divide a retirement account in divorce and what to do with the funds, so you might want to consult a financial professional along with an attorney to ensure that you fully understand the implications of any decisions. You may also want to try to negotiate an agreement regarding how to divide the retirement account and other assets with the assistance of your attorney rather than going to court