Avoid Costly Mistakes in Divorce in 2015

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  The IRA is likely subject to ordinary income tax rates when dollars are withdrawn.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

Email: twprather@paynewealthpartners.com

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The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

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