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IRA

Using Retirement Income After Divorce

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Many couples who divorce split up money saved for retirement. This may lead to tricky situations for those who need the money now, but are too young to receive retirement benefits. So what do you do?

Be sure to ask your financial adviser about a Qualified Domestic Relations Order (QDRO, pronounced “quadro”).

A QDRO is used to transfer your portion of your spouse’s retirement plan to an IRA in your name. As you probably know, you can’t take money from your IRA without penalty until you are 59-1/2.

But if you need money to live on now, you can choose to have the funds transferred from your husband’s plan directly to you, rather than transferring them to your IRA. You will have to pay tax on the money you receive, but there won’t be any 10% penalty if the money comes from a retirement plan other than an IRA.

If you don’t want to pay all those taxes up front (and who would?) you can choose to have the money sent directly to your IRA. Then you can annuitize the IRA, taking monthly distributions based on your remaining lifetime.

Although IRA distributions before age 59-1/2 are usually subject to a 10% penalty tax, an exception applies if you annuitize the IRA and continue receiving the payments until you are 59-1/2 (and for a minimum of five years).