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Property division: how to split IRA funds in a divorce

Splitting up assets in a California divorce can be a complicated process. When dealing with major assets, such as a home, decisions need to be made that will be fair and equitable to all parties. For many couples, their largest asset is an IRA plan. Property division issues must be addressed to avoid potential penalties or taxes. Financial advisors recommend understanding all the tax implications before splitting the funds in an IRA.

Experts cite an example where a couple attempted to divide their property themselves, since they were willing to cooperate with each other. They made decisions about child custody and division of property. The husband, who had an IRA, planned to give half of it to his ex-wife to help her out financially. Unfortunately, he made this decision prior to the finalization of the divorce.

Since the couple took a distribution from an IRA, significant taxes and penalties were required on the amount. To avoid this dilemma, financial plans recommend a plan of action in a divorce. It is absolutely necessary to have the divorce decree from the court before an IRA can be divided without the taxes and penalties.

Another point to remember is that a Qualified Domestic Relations Order (QDRO) is not used with an IRA. A QDRO is used only with company retirement plans. Also, the 10 percent penalty for an IRA distribution in a divorce situation is always required; there are no exceptions.

There is definitely a correct method to divide IRA funds without incurring the tax liability or penalties. If would be wise to contact a California divorce lawyer when dealing with issues surrounding division of property. An experienced lawyer will guide clients through the complex process and work toward achieving the best possible outcome in the divorce proceedings for them.

Source: financialplanning.com, "The wrong way to split an IRA in a divorce", Ed Slott, Aug. 31, 2017

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