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Divorce 401(k) division mistakes you should avoid

On Behalf of | Mar 19, 2018 | Blog

When you are getting divorced, your focus may be drawn to your largest and most significant assets. You might be very concerned about what will happen with this property in the divorce, and what this will mean for your future.

For many divorcing couples, retirement accounts number among their largest assets. There are many different types of retirement accounts out there. One very common variety is the 401(k) workplace retirement plan. So, many divorces here in Pennsylvania involve property division issues related to these retirement assets. When 401(k) plans are among the marital assets in your divorce, what happens related to the division of such accounts can have lasting impacts. So, avoiding common mistakes when it comes to 401(k) division can be very important when you are going through a divorce. Here are examples of some mistakes to steer clear of.

Making inaccurate assumptions about how accounts will be divided

Such assumptions could lead to you making costly mistakes during property division proceedings and negotiations. One false assumption divorcing individuals here in Pennsylvania might make is assuming that 401(k) accounts are automatically divided 50/50 in divorces.

It is true that as long as such plans qualify as marital property, they are generally subject to division in divorce. However, division does not necessarily mean a 50/50 split. Pennsylvania uses equitable division principles for property division. So, the focus is on a fair and equitable split of marital assets, which is not always 50/50.

So, what happens during property division proceedings and negotiations in Pennsylvania divorces has big impacts when it comes to 401(k) division, as it affects what sort of split will ultimately occur. Given this, paying close attention to issues related to these retirement accounts can be very important during such proceedings and negotiations.

Ignoring tax implications

When 401(k) plans are divided in a divorce, there are various things that could happen with the proceeds from the split. For example, they could be transferred to another retirement account or transferred out into cash. Which of these methods is used could have tax implications. As tax implications can have significant financial affects, ignoring tax matters when addressing 401(k) issues in your divorce could lead to you facing some very unwelcome surprises down the line.

QDRO Mistakes

Certain retirement accounts have a special added required step when it comes to dividing them in a divorce. This is the requirement to have a separate order called a qualified domestic relations order (QDRO) which addresses how the account will be divided. 401(k) plans are among the accounts that require a QDRO to divide.

So, these documents play a very important role when it comes to 401(k) division in a divorce. The specific terms of these orders, and how accurately they reflect things such as the intended split decided on in property division negotiations, can have very big impacts moving forward. So, avoiding mistakes and oversights when it comes to these documents can be critical. Given this, QDRO guidance is among the guidance it could be very important for you to seek out when it comes to 401(k) division issues in a divorce.

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