How Is a 401(k) Split in a Divorce?

By Bryan Driscoll, J.D.

How Is a 401(k) Split in a Divorce?

By Bryan Driscoll, J.D.

Splitting a 401(k) can be a complex process. During divorce, the court must divide all marital assets between you and your spouse. Some assets are easier to divide than others. Dividing a 401(k) is an important part of divorce. But it comes with potential tax penalties. Making sure you understand how to complete this process can help you save time and money during your divorce.

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Division of a 401(k)

A 401(k) is a marital asset. The court must split all marital assets and liabilities during the divorce proceeding. Dividing the assets during divorce requires several steps.

1. Your divorce order must specify division.

In your final divorce order, the court must specifically state that your 401(k) a marital asset subject to division. Sometimes, all funds in the account will be split. But if you paid into your 401(k) before marriage, the court may decide that only a portion of your retirement account should be divided.

2. A qualified domestic relations order must be drafted.

This order, also referred to as a QDRO, tells the administrator of your 401(k) how to divide the account so the division complies with the Employee Retirement Income Security Act (ERISA). The QDRO will also specify the rights of each party to the asset.

3. Both the judge and the plan administrator must sign the QDRO.

The judge will review the QDRO to ensure that it complies with your state laws. The 401(k) plan administrator will review and sign the QDRO since they are the one responsible to the federal government for ensuring the distribution is legal.

Distributions, Penalties, and Risks

The QDRO will state how your spouse should receive their share of 401(k) assets. They might choose to roll the funds into their own retirement account, receive a cash payment, or leave the funds in your account and receive distributions upon your retirement.

While it's up to the individual regarding how they would like to receive their share, they should keep in mind the potential penalties if the distribution isn't done correctly. According to the IRS, if your spouse takes an option other than a one time cash payout, they can't change their mind at a later time.

The IRS makes clear that if your spouse wants a one time cash payout, it must be stated in the QDRO. Otherwise, they are subject to the same restrictions as you and will be penalized 10% if they make an early withdrawal. The IRS would also tax your spouse on the distribution as regular income.

A final order of divorce is not sufficient for distribution of funds in a 401(k). Until your attorney or your spouse's attorney drafts the QDRO clearly specifying their requested distribution choice, their share of the 401(k) is in limbo. If you die or retire before the QDRO is drafted and approved, your spouse would be in jeopardy of losing the benefit.

Deciding how to divide your assets during divorce is complex, time consuming, and emotional. Splitting a 401(k) adds additional legal and tax complications to the process. Make sure you understand the process to avoid potential pitfalls.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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