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How will the 401(k) be divided in your divorce settlement?

Retirement accounts started in the course of a marriage are categorized as community property in a Texas divorce. That means the retirement account will be split between the divorcing parties. For decades, real estate such as the family home was the biggest asset to consider, but now, as more baby boomers are deciding to end their marriages, significant funds in 401(k) and pension plans can be more valuable than real property.

Spouses considering divorce should be aware of the process for splitting a retirement account. The Qualified Domestic Relations Order (QDRO) is the document that tells how a 401(k) or other private-sector retirement plan should be divided between the plan participant and his or her soon-to-be ex. It is extremely important, then, that this document is addressed during the divorce process.

The QDRO will indicate how the monies in the account will be withdrawn and paid out, so carefully reviewing the QDRO with an attorney can help a divorcing spouse plan for the future. Some 401(k) funds allow for a lump payment, and other plans pay out over the course of years.

Another issue is the tax liability that comes with receiving funds from a retirement plan. How will that tax figure into the divorce settlement?

It is also important to determine whether a penalty will be assessed for withdrawing the funds.

In any case, significant assets in a marriage can lead to complex property division in the event of divorce. To help ensure the best outcome, it is a good idea to develop a financial strategy with a divorce attorney.

Source: phillyburbs.com, "Your Assets in a Divorce," Loretta Hutchinson, July 22, 2013

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