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Don’t withdraw money from retirement accounts in divorce

| Jan 29, 2020 | Divorce |

Texans who are going through divorce may face financial difficulties. They might have increased expenses because they no longer have two incomes on which to rely. The added expenses combined with the legal costs of the divorce case can lead some people to turn to their 401(k)s or IRAs to make withdrawals and cover their expenses. People should avoid taking early withdrawals from their retirement accounts during divorces because of the potential penalties and legal problems that doing so can cause.

With a few exceptions, early withdrawals that people take from their 401(k)s and IRAs are subject to a 10% early withdrawal penalty from the IRS. Since contributions are made to these types of accounts on a pre-tax basis, the withdrawal amounts are added to the payee’s income for the tax year and are taxed at their income tax rates. Together, the combination of the early withdrawal penalty and the income taxes on the amount withdrawn can cause the payee to owe tens of thousands of dollars in taxes.

People can also run into problems when they withdraw money from their retirement accounts during divorce. The amounts that have accrued in retirement accounts during a marriage are considered to be part of the marital estate. This means that they are subject to division. If someone withdraws money from the account, they may have to pay half of the amount withdrawn to the spouse during the property division portion of their divorce.

Individuals might want to talk to divorce attorneys before they dip into their retirement accounts. Experienced family law attorneys may help them figure out other options to make ends meet. The attorneys might file motions for temporary support during divorce so that clients can make their financial ends meet.

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