Zuba & Associates, P.C.

Divorce and retirement accounts

Some divorced couples end up returning to an Illinois court for an agreement modification, but many others can only wish they had the opportunity to do it all over again. Unfortunately, not all mistakes can be fixed after the fact and are best off avoided in the first place. One potentially costly error is failure to obtain a qualified domestic relations order (QDRO) prior to the division of a retirement account.

Funds that are prematurely withdrawn from an IRA or another qualified retirement account generally result in a penalty. Simply withdrawing funds pursuant to property division in a divorce agreement does not stop the imposition of penalties.

Consider that the owner of the account makes the withdrawal set in the divorce agreement and transfers those funds to the former spouse. This makes the owner of the account liable for regular income taxes and penalties. The QDRO changes the situation by shifting the tax burden onto the party ultimately receiving the funds. On the other side, a party receiving the funds may use the QDRO to roll retirement assets into another IRA, which forestalls tax payments.

When used appropriately, the QDRO may prevent any penalties or increased taxes otherwise caused by retirement withdrawals for property division. This can simplify negotiations over property division and allow the couple to focus on other divorce legal issues. Each spouse may benefit by having their own attorney participate in a comprehensive settlement agreement that covers all aspects of property division as well as the other applicable divorce legal issues such as alimony and child custody.

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Zuba & Associates, P.C

Firm Location:

6067 Strathmoor Drive
Rockford, IL 61107

Phone: 815-397-7000
Fax: 815-397-1834
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