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Threats to retirement funds during divorce

Married couples who live in Maryland can be forced to pay high penalty costs and taxes when splitting retirement funds if they do not process their transactions appropriately.

As 2015 gets underway, many husbands and wives in the state of Maryland may make the difficult decision to get divorced. The reasons for choosing divorce are as varied as the number of divorces yet some of the concerns that divorcing couples face are similar from situation to situation. How to guard against threats to retirement assets when getting a divorce is one such concern.

What is the biggest threat to retirement accounts?

When a pension fund, 401K or other retirement account is ordered to be split in any way between the husband and wife in a divorce, the money is often disbursed from the account. At this point, the risk to the assets becomes apparent. If the IRS deems this disbursement to be a way of the spouses to collect money early and tax-free, extremely high taxes and early withdrawal penalties can be assessed, eating up unnecessary portions of the saved money.

For couples who are in their 50s, 60s or even older this is of grave concern because they may have little opportunity to recoup their losses. The National Center for Family and Marriage Research information published in Forbes shows a rise in the number of divorce cases among people at these later stages in life. However, even for couples in their 30s and 40s, the need to preserve long-term savings is great.

What can be done to save assets?

Fortunately, couples in Maryland do have options when it comes to saving the assets in their retirement accounts. One option is to properly reinvest any monies received from a disbursement. A spouse in California opted not to do this but instead to simply accept the money in cash. As a result, Forbes reported that this spouse was left with a rather unpleasant tax bill to pay.

Another important and useful way to guard against losses in the form of taxes or penalties is by using a Qualified Domestic Relations Order. This document, also called a QDRO for short, is a legal way of informing tax entities or other operations that a particular financial transaction is part of a divorce settlement. This avoids the potential for it to be considered a way of accessing money when it should not be accessed.

What should happen to save money?

When a divorce is imminent, talking to an attorney should be one of the first steps a person in Maryland takes. Understanding the nuances of the law can help to save losses that otherwise eat up valuable retirement assets.

Keywords: divorce, retirement, assets