There are many elements to a divorce that are complex and costly, but a 401(k) plan doesn’t have to be one of them. While it must be part of the community property settlement in a divorce proceeding, it does not have to incur the 10% penalty for early withdrawal that a normal early distribution would.
401k Division in Divorce
When a couple with a 401(k) plans divorces, there must be consideration of the divorce 401(k) division, as well. The money invested in that 401(k) during the marriage is part of the community property that must be divided according to state laws:
- Community Property States require that all property be divided evenly, including a 401(k) plan
- Equitable Distribution States require that the court divide all property, including a 401(k) plan, equitably, or fairly
- There are generally three options for those determining a divorce 401(k) distribution:
- Lump Sum Settlement based on the value of the 401(k) at the time of the divorce
- Division of the 401(k) through a divorce 401(k) QDRO that grants a partial divorce 401(k) transfer to the beneficiary to rollover the money into another retirement plan
- Orders to the plan administer to establish an alternate payee account to provide divorce 401(k) distribution payments to the spouse for a specified length of time
These options must be either determined or approved by a court, at which time it will issue an order, which the plan owner must use to fill out a Qualified Domestic Relations Order (QDRO). That divorce 401(k) QDRO must be complete and clear. Any that do not meet IRS standards may result in a 10% penalty on the divorce 401(k) transfer or distribution.
Divorce 401k Division Legal Advice
There are cases where parties have lost thousands of dollars because they failed to follow precise instructions or wise principles in determining their divorce 401(k) division. A divorce attorney or tax lawyer can provide the advice to protect parties from such losses and ensure that both parties have the opportunity to save for their future.