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Dividing retirement plans calls for special care

Many Springfield, Massachusetts, residents have a lot of wealth tied up in their retirement plans. These plans are often offered through one’s work. Plans, including pensions and 401(k) investment plans, are a common way of saving money up for retirement, as they usually have favorable tax consequences associated with them.

Moreover, many employers are willing to match contributions to 401(k) plans, at least to a certain extent. In the event of a divorce, though, retirement plans will normally be considered marital property and, thus, subject to property division. Divvying up one’s retirement savings with an ex-spouse can be a contentious process, especially if there are efforts to try and bargain so that one can keep his or her plan in exchange for other property.

Settling on how a plan will be divided is only half the battle, however. Generally, withdrawing funds from a retirement plan, even when it is legally necessary to do so, can carry with it significant tax penalties.

Therefore, if a plan has to be divided as part of a divorce, it will be necessary to prepare and submit a Qualified Domestic Relations Order, or QDRO, first to the judge and then to the administrator of the plan for their approval. In order to avoid adverse tax consequences or other problems, the QDRO must satisfy the rules of the IRS and also clearly and correctly specify how the plan is to be divided.

Messing up the legal details of a QDRO can, at best, mean delays in the divorce process and, at worst, cause significant financial hardship. This is why it is so important for a Massachusetts resident to trust this matter to an experienced attorney.