If you are going through a divorce, you and your spouse will need to equitably divide assets that were acquired during your marriage. Splitting up your checking account might be relatively straightforward, but dividing a 401(k) account is a bit trickier. You might not be thinking about retiring now but safeguarding your future is important. Here is what you need to know about dividing your (or your spouse’s) 401(k) in a divorce:
1. You will need a court order: You cannot simply pull money out of your 401(k) account or you will end up facing a withdrawal penalty and taxes. To properly split your 401(k) account, you will need a Qualified Domestic Relations Order (QDRO), which will confirm each spouse’s right to a portion of the money, letting you off the hook for the aforementioned penalties and taxes. If you or your spouse also happen to have a pension or other employer-sponsored plan, you will need separate orders for each account. However, you do not need a QDRO to split an IRA. There is a separate process for that, which is called “transfer incident to divorce.”
2.State law will determine how it is divided: Colorado is an equitable distribution state, which means the court will look at a number of factors to determine the division of all of the marital assets, including retirement accounts. Some of those factors include: the financial situation of each spouse, the ability of each person to earn income, the ages of the parties, and the duration of the marriage. Equitably does not necessarily mean equally, so the Court will not automatically provide each party with 50% of the marital assets, although this is frequently the case.
3.Distribution options: If you are on the receiving end of the 401(k) transfer, there are a few different ways to obtain the money. You can roll the assets over into your own qualified retirement plan through a direct transfer, defer taking the distribution until your former spouse retires, or you can cash out your portion. Cashing out might seem like the best option, but it can be costly. If you are not 59 ½ years-old at the time of the payout, you could end up paying income taxes and a 10% early withdrawal penalty. Each spouse should consult a tax accountant or attorney to assist in determining the best course of action with respect to receiving retirement assets.
4.The Bigger Picture: A 401(k) is just one financial asset to be dealt with during a divorce. You may or may not have to divide a 401(k), depending on the other assets and debts of your marriage. A lot of money may be on the line so it’s important to have an informed family law attorney by your side. If you are going through a divorce, whether heated or amicable, no case is too complex or challenging for us. GEM Family Law is focused on providing professional, prompt, and personalized representation to clients in Denver and surrounding communities.