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Tax and legal implications of retirement accounts in a divorce

While married, Maryland residents do not often consider the tax and legal implications associated with retirement accounts. However, when they plan to divorce, these two issues should become a concern before entering into settlement negotiations. Dividing retirement accounts often requires additional legal steps in order to ensure that neither party is saddled with a large tax bill.

For instance, when considering dividing a retirement account, the tax ramifications need to be fully explored first. There are often penalties for early withdrawal to the account holder in addition to the taxes that must be paid on the amount withdrawn. The party receiving a share of the account might also be liable for taxes on the amount received.

Maryland residents might not be familiar with a QDRO, which is a qualified domestic relations order. This is an order provided by the court that is needed in order to divide a retirement account without the tax ramifications. Receiving a QDRO is not always enough, however. The party whose name the account is in should contact the plan administrator to ensure that the order will be honored.

The potential downside of dividing other marital assets should also be scrutinized prior to doing so. If a transfer does not satisfy the legal requirements, one or both parties could encounter problems in the future. Furthermore, accepting an asset without first understanding what tax implications, if any, accompany the asset could cause significant financial issues in the future. Therefore, before entering into divorce settlement negotiations, it would be beneficial to seek the advice and assistance of an attorney who can help explain the true value of each major asset that is to be divided.

Source: U.S. News and World Report, "10 Ways to Prevent a Divorce From Ruining Your Finances", Maryalene Laponsie, Sept. 29, 2016

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