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How a 401(k) account is addressed in a divorce

On Behalf of | Apr 5, 2024 | Family Law |

Transitioning from married life to separation can be challenging. Many divorcing couples might find that a reality. Not only are they emotionally affected, but it’s also a huge possibility that most of their finances, including their retirement savings, will be hurt.

This is especially true for 401(k) accounts, which are often a significant part of a couple’s marital or shared assets.

Impact on retirement accounts

Many working individuals have a 401(k) account. It’s a common type of retirement savings account. Even though this type of account is usually under one person’s name, the money that goes into it during a marriage belongs to both parties.

In a divorce, the couple must file a Qualified Domestic Relations Order (QDRO) in court to divide these funds. This document outlines their preferences regarding the division of money in their 401(k) accounts.

If the court determines that a spouse should receive some of the funds from the other spouse’s 401(k), the most tax-efficient way is to roll the money directly into their retirement account. However, if the spouse needs funds immediately for urgent expenses, they can opt to have a portion given directly to them.

It’s important to remember that while they won’t pay the usual 10% penalty for early withdrawal, they will still be liable for regular taxes.

Legal help in asset division

Couples should clearly understand their asset division to avoid misunderstandings and potential financial complications later. This understanding should include the steps involved in dividing retirement accounts, not just 401(k)s but also pension accounts, another type of marital asset.

However, understanding these processes and drafting the required legal documents can be complex. For this reason, it can be beneficial to seek the help of a lawyer. A lawyer can provide assistance in the fair and legal division of assets, including retirement accounts.