How does a 401(k) get divided in a Divorce?

There are many common assets that are divided between both parties, one of the most important being the 401(k) which is one of the more valuable assets.  Individuals often work their whole career trying to build up their 401(k) balances so that they can retire.

However, in a divorce, the 401(k) often ends up being divided as part of the property division aspect of a divorce. In some cases, the 401(k) does not need to be divided. It could be the 401(k) is offset against other marital assets. In other cases, however, the 401(k) has to be divided because it is the only equitable way to achieve a just division of marital property and debt.

If a 401(k) is to be divided, a Qualified Domestic Relations Order (QDRO) issued by the court will be necessary.  There are three steps that are needed when it comes to splitting a 401(k) during a divorce:

·         The court will order the divorce to take place in the divorce decree.

·         Draw up a QDRO, which describes to the plan administrator how it should be split to remain compliant with the Employee Retirement Income Security Act.

·         The judge and the plan administrator will sign the QDRO naming the receiving spouse is known as the alternate payee.

To understand how the divorce impactions of splitting a 401(k), it is important to know the options as a separated couple. Thus, if the court orders half the 401(k) to go to the spouse, it is likely that they will want to roll the funds over into their own retirement account. This is permissible as long as this is done via transfer. If the spouse decides to leave the funds in the account until they retire, they will also avoid paying taxes until that time.

The other choice is to simply cash out half that is owed to the other party. Under the Internal Revenue Service Code, if the cash-out is part of a QDRO, it will not be subject to the 10 percent penalty. If that person is the receiving spouse, this is a great way to take the benefits now as opposed to roll them over until later. There will be income tax consequences for doing this.

It is important to remember that if one is considering cash-out option it is a one-time deal. A person will need to act quickly if the money is something a person wants. Unless that person is over 59.5, there will be a 10% penalty if that person decides later to cash it out. Even if there is a QDRO that has been issued, it is important to do things in an efficient manner.

For a 401(k) withdrawal due to divorce to take place without penalties, the spouse that holds the 401(k) has the responsibility to submit it to the plan administrator in an efficient manner. The plan administrator should get back to the parties promptly. It is important to note that if a significant time passes, a follow-up is often important. If a QDRO is in place, it is a person’s right to contact the plan themselves as a prospective alternate payee and ask about their spouse’s benefits. There should be no pushback because the laws under the Department of Labor give a person a right to said information.

Having an attorney with the resources and knowledge to give you the best representation is vital to your interest and the interest of your family.  You also want to make sure they will exhaust all avenues and be willing to research, pursue and implement strategies to provide the best possible outcome.

Rob McAngus, Partner with Verner Brumley Parker, P.C., is Board Certified in family Law and his practice is devoted primarily to family law, including high conflict divorce, custody cases, and complex property issues. In addition to being selected on the Board of Directors for the Family Law Section of the Dallas Bar Association; he values your priorities as a parent and works with you to achieve the goals that will help transition your family to a new normal.  As both an adopted child and a member of a blended family, Rob can provide a unique perspective in the practice of family law.

Rob has been recognized in Super Lawyers as a Rising Star in 2016 through 2020, and recently The National Advocates recognized Rob as one of the Top 40 Under 40.  He can be reached by calling 214.526.5234 or email at rmcangus@vernerbrumley.com.  Mr. McAngus received his bachelor’s degree cum laude and master’s degree from Baylor University and graduated cum laude from the Dedman School of Law at Southern Methodist University.