401(k) & Divorce
When you own a 401k plan and you are going through a divorce, your assets may be forcibly divided by the court. Normally, Employee Retirement Income Security Act (ERISA) provisions forbid any kind of transfer from your 401k into another person's name. However, divorce is one exception to this rule. If you are involved in a divorce, you must know how 401k plans may be divided since it may affect your retirement planning.
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Process
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When you are involved in a divorce, the court may issue a qualified domestic relations order, or QDRO. This order allows the court to divide retirement assets between you and your spouse. The QDRO must be issued by the judge before any assets may be split. Any distributions made prior to the order will be considered a normal or early distribution based on your age.
Significance
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The order provides the only legal way for you to receive money from a spouse's retirement account. ERISA prevents any other kind of account splitting.
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Benefit
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The benefit of a QDRO is if you are the recipient of your spouse's retirement account. Once the order has been issued, you will receive the funds. These funds must be deposited into a new retirement account that you set up. However, once set up, the funds may be treated as your own. You may make contributions and withdrawals as you would under any other retirement plan.
Disadvantage
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The disadvantage to QDROs is that if you are forced to split your assets with your spouse, you will need to rebuild your retirement savings. QDROs force the split of your 401k plan. You lose any vested employer match and any investment gains as a result so you are not limited to just contributions that you make to the plan.
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