Even if the split is amicable, divorce often becomes contentious when it comes to dividing the marital property. Deciding who gets grandma’s silver or determining the value of the classic comic book collection can cause arguments and intense negotiations. However, it can get even more complicated when apportioning a retirement account, but here are some basic rules that apply.
According to SmartAsset, you need a court order to divide a 401(k). A Qualified Domestic Relations Order, signed by a judge, confirms that each spouse has the right to a portion of the money. This order also lets the account owner off the hook when it comes to paying taxes or a penalty for early withdrawal.
Equitable Does Not Mean Equal
The judge must sign an order for each pension or employer-sponsored plan, stating how much the receiving spouse gets, either in a dollar amount or percentage. IRAs require a process called “transfer incident to divorce,” to divide the assets, rather than a QDRO. When determining the distribution of the funds, several factors, including your marriage length, income potential and each spouse’s financial situation.
Account Distribution Options
The spouse who receives the 401(k) distribution can choose how he or she gets the funds. If deferment until the account owner’s retirement is preferable, you can take a lump sum or regular payments. The second option is to roll the assets into your own retirement plan through a direct transfer, which enables you to avoid paying a penalty. The third option is cashing out. Although you have access to the money, the taxes and fees may be sizable.
Property and debt division is stressful. Understanding your options early in the process can help ease the tension and smooth this part of the process.