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How is a 401(k) handled during a divorce?

On Behalf of | Aug 8, 2023 | Divorce

People who have worked hard to build up a retirement account enjoy the security of knowing they’ll have it to enjoy life. A divorce is one situation that can impact the money in these accounts. Unless both parties have retirement accounts of similar value, an account may have to be divided during the property division process. 

Dividing retirement accounts, such as 401(k) accounts, requires a special document known as a qualified domestic relations order to divide them. This document enables one party to move part of the account to the other without incurring early withdrawal penalties or exorbitant taxes. 

What can the QDRO do?

The QDRO contains specific information that outlines precisely what the plan administrator must do. It includes information on what plan the funds are being removed from and who is getting them. 

Another thing the QDRO contains is the division method. This can be written out as a specific dollar amount, or it can be done as a percentage of the total in the account. Additionally, the frequency of payments is included. It’s possible to have a single lump sum payment, but you may also have a regularly occurring payment. 

A QDRO can’t distribute funds that aren’t in the account. It also can’t do anything that goes against the rules of the account. The plan administrator must approve the QDRO. If it isn’t approved, it’s returned for revision. 

Anyone going through a divorce that includes considerable assets should ensure they understand their options for handling these. Working with someone familiar with this type of property division is often beneficial.