A 401k is part of the community assets in a divorce. A divorce can be one of the most emotionally draining processes a person can go through. But the feeling of disappointment, loss and frustration is only one part of the agony. There are also money issues. Divorce can lead to a messy battle for the family assets and the 401k is considered an asset. The 401k is considered marital property unless otherwise protected in the fund’s administration plan. Also, the settlement only applies to amounts accrued during the marriage. Here are a few things you should know about your 401k and divorce.

Time is of the Essence

If you would like to cash out your 401k because of an impending divorce action, you must move quickly. Your spouse can take out a loan against the full amount or even ask the plan administrator to cash out the money. While some 401k plans do not allow any action without the consent of the spouse, many more have no such restrictions. Call the administrator and ask them to suspend any further action because of divorce. Most administrators will place a red flag on the account.

The QDRO

If the 401k of one or both spouses is contested in the divorce, its division must be determined by a court through a QDRO. A QDRO is a Qualified Domestic Relations Order. It is a decree that indicates an alternate payee for retirement funds. The QDRO is not only used for the 401k, it can also be issued for any other retirement fund, such as the 403b. The QDRO states the percentage due to the alternate payee and the period to which the order applies. It outlines the amount to be paid for alimony, child support and for matrimonial property.

Avoiding Tax Penalties

Tax penalties hinge on the proper issuance and verification of the QDRO that is used for dividing the 401k. Ordinarily, the 401k would be subject to tax if the funds are moved before the retirement age. A properly executed QDRO legally exempts one from the 10% federal tax they would otherwise pay for a withdrawal before attaining 59.5 years. But if it is not done correctly, the Internal Revenue Service will have a legitimate tax claim, including penalties, for the amount forfeited to a former spouse.

Community Property Law

The percentage of the 401k that is given to each spouse does not necessarily have to adhere to a strict 50-50 rule, except in a community property state. If the divorce is filed in a state with community property law, then the 401k is usually divided equally. A community property state recognizes that everything that is acquired during a marriage belongs equally to the husband and wife. There are currently 9 states with community property law, they are:

  • California
  • Arizona
  • Louisiana
  • Idaho
  • New Mexico
  • Nevada
  • Wisconsin
  • Washington
  • Texas
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