Divorce Guide

Divorce Guide

401k Divorce Settlement

401k divorce settlement is the division of the financial assets of the retirement plan. It is the Employer sponsored retirement plan. The money which you earn whole of your life is saved and kept for your future. But in divorce your spouse or any other dependent is entitled with some of the part of 401 k assets. In such a case court issues a QDRO as a part divorce settlement, which will give the information about how when and what are the divisions of your 401k account.

Role of QDRO in divorce settlement:

QDRO is the order, decree or the court judgment which is named for someone other than you entitled as a recipient of your 401k assets. The other person is named as the alternate payee which can be your spouse, your child or any other dependent. QDRO is used for dividing the assets during divorce settlement for child support payments, property rights payments and alimony payments. If going through a divorce, be sure to ask your company‘s plan administrator for a model QDRO form for your plan.

Rights of 401k in divorce:

401 k accounts are subjected to division when the married couple divorces. This division depends on the law of state where the divorce takes place. There are different laws for some states while they are same for some.

Division on state laws:

  • Community property state: In community property state the portion of 401k has to be equally divided between the parties for divorce settlement.
  • Equitable distribution: in equitable distribution states the judge decides the fairest way to divide 401k based on the evidences provided to the court on the factors why the marriage broke down.
  • Contemporary division: In this division both the parties have the ability to negotiate and the court has the ability to order their division 0f 401k into separate accounts during their period of divorce. This order is very simple as there is no employer contribution in this plan.
  • Taxes and penalties: As the 401k account splits, the same restrictions are applicable to the account which was before the divorce. Which means the other party who is receiving the money must re-invest or roll over into a new tax deferred investment or need to pay taxes and penalties for easy withdrawals.

Options for 401k divorce settlement:

  • In 401k divorce settlement money can be taken in cash and can be used after the divorce.
  • If the spouse receives any amount the spouse has to pay tax on it. By this way the spouse can earn or invest from this money.
  • The spouse has the ability to roll over this money into IRA (individual retirement arrangement) which offers tax advantages for retirement savings.

Thus in 401k divorce settlement one need to plan all the financial assets properly. Both the spouses should be ready to the division of these assets.

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