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Considerations when dividing retirement accounts during divorce

Arizona couples who are divorcing will usually need to negotiate the division of their property. During this process, the negotiations can go from simple to complicated depending on the types of assets that the couple has accrued and how they want to divide them. The division of retirement accounts, for example, might prove to be a complex process.

Types of retirement accounts

During divorce negotiations, couples might need to divide a variety of retirement accounts, each with their own set of rules and regulations when it comes to division of assets. These types of accounts include:

  • Pension plans
  • IRAs
  • 401(k)s
  • Annuities

What are the rules?

Property division involving complex assets depends on in-depth knowledge of how these accounts work, the rules when it comes to dividing them and the tax implications during the divorce and down the road. A qualified domestic relations order, or QDRO, is needed to divide 401(k)s and pensions. However, the rules for these two types of accounts are different; pension plans are usually considered owned by both spouses and generally will pay benefits directly to ex-spouses.

Division of 401(k)s can include rollovers into IRA accounts to avoid penalties and taxes or liquidating the account, which will lead to penalties and taxes pending legal approval. Another option is dividing the account.

Annuities can be divided by either creating two new contracts or selling the annuity, but there are tax implications involved. IRAs can be divided using the divorce decree. For IRAs, one spouse can transfer funds to the other spouse’s IRA, avoiding a 10% early withdrawal penalty for those who are younger than 59.5.

As couples prepare for a divorce, they should consider consulting professionals with experience in the division of property. This is an important part of the divorce process that can have a lasting impact on financial well-being, so each spouse will want an advocate for their interests.