How Is a 401(k) Split in a Divorce?
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In divorce proceedings, 401(k) retirement plans are divided between spouses by the court. The courts generally consider a 401(k) to be marital property, provided that the funds it contains were paid into during the course of the marriage. Your 401(k) will thus be divided by a judge according to your state's marital property laws, which differ between jurisdictions.
Factors
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When deciding how to divide 401(k) funds, the judge will look at factors such as the length of your marriage, each spouse's income and assets, as well how the rest of your marital property has been divided. If you live in a community property state, the 401(k) will be split 50/50 between the two spouses. In rare instances, a 401(k) distribution may be made in the name of a couple's minor child instead of the second spouse.
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QDRO
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In order to legally redistribute the funds from a 401(k), the judge must enter a qualified domestic relations order, otherwise known as a QDRO. The QDRO will outline exactly how much money will be paid out to the second spouse, as well as a timeframe in which the funds must be distributed. It also must specifically name the payee to whom the funds will be distributed. If you have more than one 401(k), they may be included in the same QDRO. When the court issues your QDRO, it may not be labeled as such. A divorce decree or property settlement agreement may function as a QDRO provided that it meets all of your state's legal requirements.
Documentation
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You will need to provide the administrator of your 401(k) or your employer with a certified copy of the QDRO in order for the funds to be released to your spouse or minor child designee. The QDRO should reflect the terms of your specific 401(k) plan and you will be responsible for providing those terms to the judge and your spouse's attorney. When filing your taxes the year after paying your spouse out of your 401(k), you will need to provide your account with a copy of the QDRO or else you will be assessed with an early withdrawal penalty.
Tax Implications
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The spouse distributing the money from his or her 401(k) will not be subject to early-withdrawal penalties, provided that the court enters a QDRO that complies with your state's property distribution rules and the requirements of your 401(k) plan. The receiving spouse will be liable for taxes on the distributed funds unless he or she rolls over the money into a qualified investment plan.
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