Dividing A 401(K)

This article is the first part in a series on the division of retirement accounts in a divorce. Today, we are discussing the division of 401(k)s.

Amounts in a 401(k) that are earned during the marriage are subject to division by the court during a divorce. This is true even if the account is titled in only one spouse’s name. However, these amounts are not always readily accessible at the time of divorce, which complicates the division.

If there are sufficient other assets, the non-owner spouse can be awarded a greater share of other property to compensate for the 401(k). If both spouses have 401(k)s, often the simplest solution is for each party to retain his or her own account, assuming they are relatively equal in value.

Dividing a 401(k) requires the use of a Qualified Domestic Relations Order, or QDRO. Without a QDRO, the owner will be taxed on the entire amount of the distribution, even if a portion is awarded to the non-owner. Most often, the QDRO will award a percentage of the account to the non-owner, though it can specify a set dollar amount instead.  

The non-owner spouse has several options for how to receive the money from the 401(k). First, the funds can be retained in the 401(k) account to withdraw at a later date. Although the owner can continue making contributions to his or her share, the non-owning spouse may not make contributions. Second, the funds may be withdrawn, either immediately or over time. The non-owner will pay income tax on any amount withdrawn, but will not pay the 10% penalty, even if the individual is under the age of 59 and ½. Finally, the funds may be rolled into an IRA in the recipient’s name. However, once this is done, the QDRO no longer applies, and the 10% early withdrawal penalty will apply.

The court may also defer jurisdiction to divide the benefits at a later date when the employee actually begins receiving distributions. Generally, this is the least desirable option, as it leaves quite a bit of uncertainty for the parties.

Do you have questions about dividing your retirement accounts? Call Katelyn to discuss your options.