Many professionals establish 401(k) accounts when starting new positions. Especially when their employers make matching contributions, setting funds aside for retirement while working may be a smart decision.
Contributions to 401(k) accounts diminish a working professional’s taxable income for the year. Theoretically, they cannot use those funds until they reach retirement age. However, when married professionals divorce, they may need to address their retirement savings as part of the property division process.
Are losses to taxes and penalties affecting retirement savings always necessary during divorce?
Account division may not be necessary
Even though spouses like you have to consider the marital contributions to a 401(k) during their property division negotiations, actually dividing the accounts may not be necessary. It may be possible to use one spouse’s savings to balance out the other’s. Even if they are not quite even, other assets or debts could help cover the gap.
Paperwork can prevent penalties
In scenarios where spouses agree that dividing the 401(k) is necessary or a judge makes that decision as part of a property division order, spouses can divide their 401(k)s without penalties or tax penalties. They simply need to have a lawyer draft a qualified domestic relations order (QDRO) that conforms to the terms established in the property division order.
After approval from both spouses and the courts, followed by the appropriate submission of the paperwork to the party managing the account, the spouses can split the contents of a 401(k) without losing 10% in penalties or reporting the withdrawn amount as income.
Understanding the various rules that influence the property division process can help spouses roughly estimate the likely outcome of their divorces. The right procedure can make it easier for people to protect key resources during divorce as they prepare accordingly.
