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3 things to know about splitting a 401(k) during divorce

by | Feb 20, 2019 | Property And Asset Division

One of the most complex aspects of divorcing your spouse is determining how to split your assets. Dividing your bank accounts or possessions may be hard enough, but when it comes to a 401(k), the stakes get higher. This retirement asset may be the largest source of marital wealth.

Not only does the significance of a 401(k) put the pressure on, but there is also a strict division process you must follow to avoid steep monetary consequences. Here are the top three things to know about managing a 401(k) in a divorce.

1. You need a special court order

Taking funds from a 401(k) is not something you can do whenever and however you want. You must obtain a Qualified Domestic Relations Order from the court. This is necessary for a smooth transfer of retirement money. The QDRO will spell out exactly how much the recipient receives. If you pull money out of your retirement without a QDRO, you may need to pay an early withdrawal penalty fee or extra taxes.

2. There are several division options

The spouse receiving the 401(k) funds has three choices for how to get the money:

  • Roll over the assets into a qualified retirement plan via a direct transfer. This is useful for avoiding penalty fees.
  • Cash out the assets for easy access to the money, but that option may be subject to penalties and income taxes.
  • Wait until the owner of the account retires, then receive it in either a lump sum or scheduled payments.

Consider all the advantages and disadvantages of each option before making a final decision.

3. You can come to your own agreement

You do not necessarily need to adhere to state laws in terms of how much a spouse gets from a 401(k). The two of you can come to an agreement together. While you may still need professional advice and a court order, deciding on the details on your own may save time and money.