Avoid Costly Mistakes in Divorce in 2015
“Divorce can be difficult enough. Don’t make it worse by lack of financial planning.
When large retirement accounts are involved, taxes can be very important and therefore should be planned for. For example, a $500,000 IRA is usually NOT as valuable as a $500,000 non-IRA investment account. The IRA is likely subject to ordinary income tax rates when dollars are withdrawn. In other words, it may be INFESTED with taxes.
Also, to execute a tax-free split of a 401(k) account in divorce, a special legal document should be drafted by a qualified attorney in addition to a divorce decree. This document must contain specific language to be approved by the 401(k) plan. The document is then called a Qualified Domestic Relations Order or QDRO.
Costly mistakes can also occur when executing transfers AFTER the divorce is final. For example, a spouse receiving part of a 401(k) account through a QDRO may want to keep these dollars in his/her own account INSIDE the 401(k) plan if allowed. If these dollars are instead ROLLED OVER to an IRA and cash is later needed prior to age 59 ½, a 10% penalty may apply to withdrawals ON TOP OF income tax. However, leaving these dollars in an account inside the 401(k) plan may allow easier access to the money WITHOUT this 10% penalty.
These rules can be very complex as there are many moving parts. So financial planning can often be invaluable in a divorce.
For more helpful information, visit our website at PayneWealthPartners.com. Thanks for watching!”
Published: January 3, 2015
Authored by: Terry Prather, CFP®, ChFC®
Direct Phone: 812-602-6307
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