Tips for dividing retirement accounts during divorce

When a couple in California decides to get a divorce, they will probably need to divide their property. This might include a retirement account that was originally intended to cover both spouses. Depending on the sort of account, the division process may be simple or more complex.

For what is known as a "qualified plan," such as a 401(k), a qualified domestic relations order may be necessary. With a QDRO, it is possible to divide the plan without being penalized for making an early withdrawal. Furthermore, it also allows the division to happen without either party being required to pay taxes on it.

Separating an IRA is different. While it may be possible to avoid paying tax when dividing an IRA following a divorce, there is still a 10 percent early withdrawal penalty. This may be the case with other types of plans as well if the spouses involved are younger than 59 1/2 years old. There are only a few exceptions to this penalty.

California, a community property state, treats most assets acquired after marriage as shared property. This usually includes the appreciated value of an asset. Therefore, even if only one spouse contributed to the retirement account, it will generally be considered shared property during property division. Although community property is supposed to be divided equally, this does not always mean that every piece of property has to be split 50/50. One solution to avoid penalties might be for the person who owns the retirement account to keep it in exchange for another asset of equal value. If the couple chooses this solution, it is important to take other factors into account. For example, there may be additional costs associated with a home such as taxes, insurance and maintenance.

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