Dividing a 401(k) plan during divorce

Dividing a 401(k) plan during divorce

| Aug 11, 2020 | Firm News |

For many couples, retirement plans are among the most valuable assets in the marriage. They are typically subject to division like most other earnings or financial benefits from employment. 

There are two major concerns when dividing retirement assets, such as 401(k) plans and IRAs. The first is getting an equitable and fair division. The second is minimizing any unnecessary tax burden on the transfer. 

Dividing a 401(k) plan

As explained on FindLaw, the fair division of 401(k) or other securities-based retirement account is a complex matter. Spouses should first consider the portion of the account which belongs in the marital estate, and then determine how precisely to divide them with regard to these potentially volatile and changeable assets. 

Minimizing tax burden of division

Divorce is a unique time with regards to 401(k) plans and many other tax-exempt retirement assets. Per the IRS, most of these complex transactions happen with the help of a qualified domestic relations order. These orders outline the details of how funds should transfer. Retirement account managers require QRDOs before taking action. 

For example, the IRS allows rollovers by recipients of payments from their spouses’ plans. For reference, a rollover is a transfer of funds from one plan to another. It might also be possible to access retirement assets early, although the exact method and the advantage of doing so would depend on the situation. 

It is typically advantageous for couples to decide on the details outside of court. For those who are unable to reach an independent agreement, the courts have the power to divide retirement assets however they see fit in accordance with the law.