If you and your spouse have made the decision to end your marriage, you may now be in the throes of figuring out how to split up your marital estate. From who gets the china set to who gets the dog and more, the decisions facing you at this time are many and difficult indeed. Some of the decisions you must make may also come with significant financial repercussions. The choice to split a 401K or other employer-sponsored retirement account may be one of those.
As explained by CNBC, if you and your spouse agree to split one of your retirement accounts, you will want to learn about the qualified domestic relations order. The QDRO can be your best defense against losing a large portion of your retirement savings in the forms of taxes and early withdrawal penalties.
Retirement distributions are typically only allowed for retirement purposes. Other distributions may be subject to significant taxation and penalties, dramatically reducing your net income. For distributions pursuant to a divorce settlement, however, a QDRO allows you to roll over a designated amount of money from one spouse’s 401K to another qualifying account without incurring any taxes or penalties. If the recipient wishes to take the money in cash, they may be responsible for any taxes on the amount.
This information is not intended to provide legal advice but is instead meant to help divorcing spouses understand the need to take great care when approaching a divorce property division settlement with the possibility of splitting a retirement account so they understand how to protect themselves against unnecessary losses.