If either you or your spouse own a 401(k) account, the assets inside it will likely be divisible during your divorce proceedings. However, this certainly doesn’t make it easy to divide a 401(k) between two people. Let’s take a look at a few issues you need to keep in mind when dividing a 401(k) during your divorce.
Spouses must have a court order if they want to divide a 401(k). The family law judge presiding over the divorce needs to approve of a Qualified Domestic Relations Order (QDRO). The QDRO confirms that both spouses have a right to part of a 401(k). This order is essential so that taxes don’t need to be paid as a result of taking money out and splitting the 401(k). The legal process that allows for splitting a 401(k) is referred to as a “transfer incident to divorce.”
To decide which spouse gets what percentage of the 401(k), a Florida family law court will review factors such as both spouses’ financial situations, the spouses’ abilities to earn incomes and how long the marriage endured to determine the fairest possible split for both sides. It’s important to note that “fair” doesn’t usually mean 50/50.
There are several options for receiving money from a 401(k) in a divorce. First, you can roll over your share into an individual retirement account (IRA) via a direct transfer, which prevents the need to pay a penalty. Second, you can leave your money inside the 401(k) and wait until you reach the appropriate age to start taking distributions. Third, you can cash out your share of the plan, but if you’re under the age of 59 1/2, you’ll need to pay income taxes along with a withdrawal penalty of 10 percent.
A divorce lawyer can help you with the division of your 401(k) during your divorce proceedings. He or she will be able to guide you toward the best possible distribution strategy that fits your legal rights and needs.
Source: SmartAsset, “4 Things to Know About Splitting up a 401(k) in a Divorce,” Rebecca Lake, accessed March 24, 2017