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Why fighting for retirement benefits in divorce is a smart move

Maryland residents who've decided to dissolve their marriages may want to consider seeking a share of their spouse's retirement benefits. In many cases, these benefits can be obtained tax-free and offer options for steady growth that makes them more valuable in the long-run than more commonly pursued assets in divorce settlements, such as homes and spousal support. Property values on homes are always uncertain, and alimony is subject to taxes. However, money in retirement accounts are sometimes exempt from taxes and might be eligible for regular increases.

A legal document called a qualified domestic relations order lets spouses transfer benefits from a retirement account to their former partner without either party being taxed. People who are under 59.5 years of age can take money from their ex's 401(k) or 403(b) account once without being taxed 10 percent for early withdrawal. These are just some of the ways people can share in their ex's retirement money without losing some to the IRS. It's better to put as much of the retirement money into one's own account, though, because it'll grow while deferring taxation.

A smart spouse will request a piece of a Roth IRA or Roth 401(k) over a traditional IRA or regular 401(k) because the Roth accounts have been pre-taxed, thus withdrawals are not subject to additional taxes. Another clever move is to seek a portion of a spouse's Social Security because people age 62 or up who meet certain requirements can get up to half of their ex's benefits and delay their own.

Retirement funds can be one of the most valuable assets a person can get in a divorce, but if their spouse knows this. getting them could be tricky. An attorney could negotiate on an individual's behalf and might recommend strategies for getting the best possible settlement.

Source: Forbes, "The Big Money Mistake Divorcing Women Make", Kerry Hannon, July 03, 2014

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