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401K splits in a divorce

On Behalf of | Oct 16, 2020 | Firm News

Family homes, bank accounts, investments and even family businesses are among some of the things that married couples must find a way to split when they get divorced.

Retirement savings like 401K accounts may also commonly be split as part of the property division settlement in a divorce. How such a split is managed may make a big difference in how much money may be lost or saved.

Early withdrawal penalties for non-retirement distributions

The United States Department of Labor explains that most distributions from 401K accounts for reasons other than retirement may be subject to early withdrawal penalties. A non-retirement distribution may be any withdrawal made by an account owner before that person reaches the age of 59 years and six months. This may include a distribution by an account owner which is then given to a former spouse per a divorce agreement.

The early withdrawal penalties may be as high as 10% of the amount taken out.

Withdrawals pursuant to a qualified domestic relations order

The spouse of a 401K account owner may be deemed an authorized payee on the account via an approved qualified domestic relations order. The QDRO must be approved by the administrator of the retirement account and may outline the distribution of funds to the authorized payee per a divorce settlement. Money paid to the authorized payee per the QDRO avoids early withdrawal penalties, salvaging more of the retirement savings.

Taxes on distributions per a QDRO

When an authorized payee receives money from a 401K per a QDRO, he or she may pay income taxes on the amount then. Taxes may be deferred by putting the money into another retirement account upon receipt.