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How to divide a 401(k) and avoid common errors

When Georgia couples get a divorce and have a 401(k) or pension to divide, they will need a document called a "qualified domestic relations order". This is one of several steps they will need to take in dividing these types of assets while avoiding paying unnecessary penalties or taxes or one person getting more than an equitable share of the account.

The QDRO should be prepared by a professional who is familiar with the document. It must specify how the distribution will be made and must be consistent with the divorce agreement. The plan administrator must approve the QDRO. A one-time distribution from a 401(k) because of divorce will not incur a penalty for a withdrawal before the age of 59 1/2, but if the distribution is not rolled into an IRA, it will be taxed. However, people should be aware that assets in a 401(k) are protected during bankruptcy proceedings while assets in an IRA are not.

Furthermore, people should not allow themselves to be removed as the beneficiary on the account until the divorce is finalized and the distribution has been made. Otherwise, if the account owner dies, the spouse might not get the money. The QDRO and the divorce decree should also state the amounts each person will receive in percentages and not dollars in case the value fluctuates.

Another option for people who have 401(k)s and other complex investments to divide is for each person to take certain assets in their entirety instead of splitting them. However, if this is the case, it is important to account for factors such as taxes and costs associated with the asset. For example, if a retirement account is taxed on distribution, its actual value might be less than it appears, and houses have costs that include insurance, upkeep and property taxes.

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