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How to divide retirement accounts

On Behalf of | Nov 30, 2015 | Divorce

Individuals in Arizona who are getting a divorce must divide their property, and this may include retirement accounts. However, there are regulations about how retirement accounts can be distributed in a divorce in order to avoid taxes and penalties.

If couples are dividing an employer-sponsored plan or a 401(k), then a Qualified Domestic Relations Order is necessary. If they are dividing an individual retirement account, then a transfer incident is necessary.

Individuals also have a choice as to how the accounts will be distributed. They may roll their share directly into their own retirement account, they might cash out or they may wish to wait until the account owner retires and then take distributions. However, individuals should keep in mind that the amount in the retirement account might not match the amount that they receive. While contributions to Roth IRAs are done after taxes, traditional IRAs, 401(k)s and 403(b)s are funded from pretax contributions.

A couple that is able to come to an agreement regarding division of property may save time and money. They might also be happier with the outcome.

Arizona is a community property state, but this does not mean that all property must be split down the middle. First, it is necessary to determine what counts as marital property. Then, a couple may agree to exchange some property. For example, one individual might agree to keep a retirement account while the other keeps the home. Couples who have children may also be happier with results following collaboration or mediation. This may better set the stage for a parenting relationship that may last for many years after the divorce. However, in some cases, couples may not be able to negotiate arrangements for property division, child custody, support and other issues. In these circumstances, divorcing couples may decide to seek legal counsel in order to make decisions about their retirement division options.