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Points to keep in mind when dividing a retirement account

The division of retirement accounts can be a point of contention for Washington couples going through divorce. According to one survey of divorce attorneys, only alimony is a more contentious issue. The division can also be complex because spouses need to do certain things to avoid having to pay taxes and early withdrawal penalties.

Dividing an IRA is fairly straightforward as long as there is another IRA to roll it into. The bank or other financial institution will probably have its own paperwork requirements. However, the process is more complicated for a 401(k) or pension plan. This requires a qualified domestic relations order, a complex document that a lawyer must prepare and the plan administrator must approve. The QDRO should say if the distribution will be rolled into an IRA. A spouse could also receive the distribution directly without a penalty; however, they would need to pay income taxes on it.

Furthermore, spouses should not agree to being removed as a beneficiary on a retirement account until the divorce is final. Otherwise, if the spouse who owns the account dies, the other spouse might not receive any of the funds.

In the absence of a document error or prenuptial agreement, both spouses are probably entitled to a portion of the retirement account even if only one made contributions to it. Washington is a community property state, and this means that assets acquired since the marriage are considered shared property and should be split equally in a divorce. If the spouse brought the retirement account into the marriage, then the amount of its appreciation since the marriage may be considered shared property. A couple may want to try to negotiate an agreement for dividing property as an alternative to litigation.

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