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The importance of a QDRO during equitable division

65396714_S.jpgWhether worth tens of thousands of dollars or significantly less, retirement savings are incredibly valuable to most people. Even relatively small accounts can provide a solid foundation for financial peace during retirement. Many divorcees in Missouri are understandably worried about how their retirement savings will be handled during equitable division.

Unless a marital agreement states otherwise, most retirement accounts are considered marital assets, as the funds were saved with the intention of supporting both parties later in life. It can be tempting to try and skirt the sometimes-complicated process of dividing up a marital estate, but doing so can have costly consequences. Those who opt for this approach usually end up eating away much of their savings in taxes and penalties that might have otherwise been avoided.

Normally, early withdrawals from retirement savings accounts are subject to steep taxes, sometimes as high as nearly 40 percent. Take for instance a $250,000 early withdrawal. If taxed at 39.6 percent, $85,000 worth of taxes would need to be paid. A 10 percent penalty for early distribution would add another $25,000, and the original withdrawn amount would be reduced to a mere $140,000. Considering how long it normally takes people to save for retirement, such a hit can be devastating.

Simply divorcing does not magically erase applicable fees and taxes. A qualified domestic relations order is the only way to avoid having to shell out a chunk of your retirement savings for otherwise avoidable taxes. A QDRO is usually completed during equitable division, during which Missouri couples can expect to each receive a share of marital assets that is considered most fair.

Source: Reuters, "Your Money: Splitting retirement accounts is tricky for DIY divorce", Beth Pinsker, Nov. 6, 2017

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