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Handling IRAs and 401(k)s in a divorce settlement

On average, an individual pays $15,000 to complete the divorce process. However, this amount could be higher or lower depending on the circumstances of a given divorce. While some Maryland residents may consider using their retirement savings to help cover this expense, there may be better ways to do it. Taking a withdrawal from a 401(k) or IRA without a divorce decree may be more expensive in the long run.

A 401(k) or similar plans such as a 403(b) will be split according to the terms of a Qualified Domestic Relations Order . This makes it possible for people to roll over money from a former spouse's plan into their own without penalty. Those who have an IRA to divide in divorce will do so pursuant to the divorce decree. An individual has up to one year to make the transfer without penalty.

If money is taken out of an IRA or 401(k) prior to a person turning 55 or 59 1/2, that withdrawal could result in income taxes owed. It could also result in a 10 percent early withdrawal penalty if it is done without a court order. Prior to the split, it is important to tally the value of such accounts. It may also be a good idea to tally the value of other financial assets such as a CD, savings account or real estate holdings.

An attorney may be helpful in answering questions about property division or about diving retirement accounts specifically. Counsel may also be able to help in the process of dividing retirement accounts in a proper manner. Doing so may save a client from paying taxes and fees, which may leave more in the account to grow over time.

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