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Avoiding retirement penalties in complex asset division

Confusion over the division of retirement assets during divorce can lead to costly mistakes for one or both parties. Couples in Georgia seeking a divorce may not realize that tax law treats 401(k) plans differently from traditional IRAs and IRA variants. Penalties can result in an enlarged tax bill and a number of negative consequences if it cannot be paid on time. Fortunately, there is a right way to go about retirement asset division that completely avoids tax penalties.

The first rule of asset division, at least when it comes to retirement accounts, is to wait for the court-approved agreement. Premature division of assets, even those later mentioned in the agreement, will result in a tax penalty. The penalty for early withdrawal from an IRA, which includes transferring funds to another person's IRA, is 10 percent of the transfer. This can obviously result in enormous costs in after a high asset divorce. Unfortunately, a signed divorce agreement is not necessarily sufficient for a penalty-free division.

The QDRO is a special document that allows penalty-free distribution from retirement plans provided by an employer. Personal retirement accounts, however, have no such protection from the penalty. The only safe way to handle IRA asset division is through a trustee-to-trustee transfer of funds pursuant to specialized language in the divorce agreement.

Couples may enter negotiations with the thought that IRA funds will be available to pay down debts or buffer the costs of divorce. Failure to understand that funds cannot be prematurely withdrawn for personal use without incurring a penalty may lead to other poor decisions. An attorney can offer protection from this and other pitfalls of complex asset division.

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