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Common pitfalls to avoid when dividing a retirement account

Arizona couples who are getting a divorce might find themselves in conflict over a retirement account. According to a 2016 survey by the American Academy of Matrimonial Lawyers, this is the second most common source of conflict in a divorce after alimony and just before business interests.

If there is a 401(k) or pension plan that needs to be divided, the couple will need a qualified domestic relations order. The plan administrator must approve the QDRO, which should be prepared by an attorney. The recipient of the distribution can take it directly or can roll it into an IRA. In the latter case, neither taxes nor penalties must be paid. In the former case, the recipient will have to pay regular income tax on the distribution but no penalties.

For an IRA, a QDRO is not necessary. However, if the recipient takes a direct distribution, there will be both taxes and penalties to pay. The financial institution will probably need a copy of the divorce decree and paperwork to complete.

Since Arizona is a community property state, this means the retirement account may be considered marital property even if only one person owns and contributes to it. In a community property state, property division is supposed to involve splitting shared assets equally. However, the couple does have options besides simply splitting all their assets 50/50. They might be able to negotiate an agreement using an alternative dispute resolution method such as mediation, in which they are entitled to have legal representation.

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