Splitting Up the 401k During a Divorce
With the stress and the unknown outcomes involved with a divorce, dividing the assets of divorcing couples can be another point of conflict and trouble. One such type of asset that couples divide is their retirement monies, most notably their 401(k) assets. The division of these assets must be done in a proper way so that penalties and inconsistencies can be avoided. The help of a family law attorney who is well connected with other advisors are critical in reaching the couples expected outcomes and goals.
Dividing 401(k)s can be an area of contention between couples. There are two major types of retirement accounts associated with 401(k)s that are at stake here: workplace retirement plans and individual retirement accounts (IRAs). This article will discuss how to make the process better understood, depending on which type of retirement account is being split up. Most Family Law attorneys will require either one (or both) parties to provide a date of marriage and date of separation statement from any retirement account.
For California couples with one partner with a workplace retirement account and another partner entitled to a portion of it, the only possible scenario for acquiring it would be through what is known as a qualified domestic relations order (QDRO). For 401(k)s as well as traditional pensions, a QDRO is a separate agreement to divorce agreements that requires an attorney to draft it to ensure that the 401(k) funds are allocated properly.
For cases in which more than one retirement account is being split, a QDRO is necessary for each account. It is essential to inform attorneys about all retirement accounts that exist in order to properly allocate the 401(k) funds.
The QDRO is a sensitive document that requires many things to be explicitly stated in order for mistakes to be averted. For example, if 401(k) funds are being transferred to a rollover IRA, the QDRO would need to mention that detail. Additionally, the QDRO would need to explicate if a partner in the former marriage chooses to receive money directly instead of going through a rollover IRA. Unlike rollover IRAs, the recipient of this money transferred directly would need to pay income taxes on the money that is received. Also, these funds can be accessed before the age of 59.5 if necessary; generally, experts agree that this money should not be accessed until retirement, but some circumstances may necessitate this.
When splitting workplace 401(k)s, it is important to make sure that the beneficiary of these funds is not changed before the finalization of the divorce. Also, it is crucial to explicitly note how much—percentage-wise (not fixed amounts)—that each spouse will end up getting of these 401(k) assets. This is important, because if gains or losses occur to these accounts, a fixed amount can mean more or less in terms of its impact on the total percentage of the retirement distribution depending on how the 401(k) performs in the market. Additionally, if bankruptcy is on the horizon, experts warn that IRAs may be at risks, but not 401(k)s. For couples undergoing bankruptcy, it is important to allocate assets into 401(k) accounts.
For individual retirement accounts, or IRAs, QDROs are not required, but couples should take caution in splitting and allocating assets properly. The divorce documents must specify the divisions that are at stake, as well as the amount of those divisions and the time when they will occur. A copy of the IRA agreement and supplemental paperwork would need to be submitted to the financial institution responsible for managing the IRA; additionally, a rollover IRA should be set up to acquire these funds.
Just because a QDRO is not needed for IRAs, it is important to pay all the necessary taxes. Couples cannot simply take matters into their own hands. Regular income taxes, as well as certain penalties, potentially, would need to be paid. Roth IRAs can also be considered within this process, but their contributions have already been taxed. However, it is still key to transfer these assets properly.
At Irwin and Irwin Family Law, we provide legal consultation and implement the appropriate legal steps to ensure your expected outcomes are handled with care. If you do have a retirement account and are going through a divorce, talk to us about what the issues are in getting this divided between you and your soon to be ex-spouse. Our contact information can be found here.