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7 Tips for Avoiding Withdrawal Penalties on Your 403(b) During a Divorce

Image: 7 Tips for Avoiding Withdrawal Penalties on Your 403(b) During a Divorce

By    |   Monday, 04 May 2015 02:32 PM

Divorce is stressful and costly enough without having to worry about tax consequences on your 403(b) plan. Your retirement account is among the assets negotiated during a divorce settlement. Your spouse may be entitled to a portion or all of the plan, depending on how you divide the assets.

Issues can be resolved without tax penalties on transferring assets from the plan. Here are seven tips to help you avoid withdrawal penalties on your 403(b) plan:

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1. Qualified Domestic Relations Order: Your attorney should draw up a qualified domestic relations order, referred to as a QDRO, which usually allows withdraws and transfers without tax penalties, depending on state laws.

The QDRO details the issues regarding the split of qualified retirement plans in the divorce settlement. The order must be approved and signed by a judge and the plan administrator.

2. Details matter: The QDRO must include all details, including a breakdown of percentages and dollar amounts, of the transfer to your spouse as agreed upon in the settlement. If it is drawn up incorrectly, it could result in taxes and tax penalties.

3. Rolling over: You can agree to have your spouse roll over the amount from your 403(b) into the spouse's IRA, Roth IRA or other qualified retirement plan. You won't be taxed on the transfer, according to Investopedia. Your spouse will follow the rules regarding tax issues in the transfer.

There will be no tax penalties, but the spouse will be taxed for funds rolled over into a Roth IRA, which taxes contributions into the account while providing tax-free distributions later on.

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4. Avoid withdrawals:
Your spouse might simply want the money, but you will be taxed and receive a tax penalty for withdrawals if you are under age 59 and a half. Try to settle through tax-free transactions.

5. Leave the money in the account: You can agree to leave the money in your account so your spouse is allowed to withdrawal a certain amount upon retirement. You will avoid any tax penalty, but be taxed on the amount withdrawn, according to expertplan.com.

6. One-time deals: The QDRO also plays an important role in one-time deals for retirement plan transactions in a divorce settlement, according to Fidelity. Your ex can withdraw an amount from your 403(b) without the 10 percent tax penalty, even if under the age limit. This procedure is usually only allowed one time, according to the details in the QDRO.

7. Talk to a professional: Discuss the tax issues of your 403(b) account with a certified divorce planner, attorney, or financial advisor. Your divorce attorney should have extensive experience regarding taxes and tax penalties in dividing up a retirement plan.

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Divorce is stressful and costly enough without having to worry about tax consequences on your 403(b) plan. Your retirement account is among the assets negotiated during a divorce settlement. Your spouse may be entitled to a portion or all of the plan, depending on how you divide the assets.
403b, tips, avoiding, penalties, divorce
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2015-32-04
Monday, 04 May 2015 02:32 PM
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