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Retirement plans require special attention during divorce process

Financial advisers recommend that the details of retirement assets be thoroughly evaluated during high-asset divorces in Alaska and across the country. Both parties in the divorcing couple will need to make decisions about how to divide retirement funds and determine the extent of tax liabilities.

If one or both spouses possess qualified defined contribution plans, like a 401(k), then they could avoid taxes if the distributions from the account are immediately placed in new individual plans that qualify for tax protection. This action is commonly known as a rollover. However, if an ex-spouse chooses to take a cash distribution, then income tax and an early withdrawal penalty would be initiated.

Tax issues can become especially complicated if one or more of the plans allowed for contributions of both pretax and after-tax income. Then, the portions that were not exposed to tax and those upon which taxes were already paid would need to be identified. In general, an ex-spouse would be assigned a pro rata share of the after-tax portion. Making determinations about the possible tax liabilities at the time of distribution and divorce could inform both ex-spouses of potential tax bills.

An attorney that practices within family law and has knowledge of the financial rules that come into play during a high-asset divorce could help a person sort through these details. Negotiations between the divorcing spouses might also be necessary to determine who gets what. The person might ask the attorney to conduct the negotiations and advocate for certain needs or strive to enforce the terms of a prenuptial agreement.

Source: WealthManagement.com, "Avoid Five Costly Mistakes in Dividing Retirement Assets During Divorce", Connie H. Buffington, Feb. 1, 2016

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