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Options for dividing a 401(k) during a divorce

Asset division when a marriage ends can be complicated, particularly when retirement assets such as 401(k) plans are added to the mix.  As provided under the 2015 Florida Statutes, Florida is an “equitable distribution” state. As such, this means regardless of whose name is on the 401(k), both spouses may have an equal claim to the plan if the money inside it was acquired during the marriage.

401khelpcenter.com explains four ways to divide a 401(k) that are often employed. One involves a lump sum provided to one spouse from a partial liquidation of the 401(k) pursuant to a Qualified Domestic Relations Order. The agreement can be structured so that the party receiving the payout bears the tax liability. However, there are significant barriers to eligibility for this method of distribution.

The second choice is that the court issues a QDRO that allows a spouse to become an alternate payee and receive distributions from a plan owned by the other spouse. It could also create two accounts from the original 401(k), one for each member of the divorcing couple. The third choice is that plan holders over the age of 59 1/2, or who no longer work for their companies, roll what is awarded to their exes into new IRAs. This option allows the recipient more investment control and allows the original holder of the plan to liquidate and distribute a former spouse’s part of his or her retirement plan without incurring taxes or penalties.

The fourth and final option is that assets of equivalent value are offered to avoid dividing the 401(k). Both sides will likely wish to calculate potential long-term changes in value of the assets offered, as well as in the retirement plan, to determine if the arrangement is truly equitable. This may be especially important in a high asset divorce. It also pays to understand the rules of a particular 401(k) plan before a QDRO is issued. Costly delays may result if plan administrators are unable to accept a QDRO’s provisions.

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Mercedes R. Wechsler, P.A.
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