Dividing and protecting your 401K in a divorce

On Behalf of | Dec 22, 2020 | Property Division

During a divorce, much attention is given to how a couple will split up their joint assets. Each person may also focus a lot of energy on what they want to keep or how they can maintain as much of their savings as possible.

When it comes to dividing a retirement plan like a 401K account, the use of a qualified domestic relations order (QDRO) may well help spouses both divide and protect the assets in the fund.

Typical retirement distributions

Under normal circumstances, a person must reach the age of 59 years and six months before taking any money out of his or her 401K plan. Should a plan owner withdraw money prior to that point, penalties may be assessed. These early withdrawal penalties may take a big bite out of the fund value, stripping a lot of the savings out of the plan owner’s hands.

Retirement distributions as part of a divorce settlement

Even when a divorce decree stipulates a 401K plan must be split between the spouses, the early withdrawal penalties may come into play should the plan owner simply withdraw money from the account and pay it to his or her former spouse.

As explained by the U.S. Department of Labor, a QDRO enables the spouse to be a named authorized payee on the account. The QDRO details the single or multiple payments to the authorized payee per the divorce agreement, and money flows directly to that person – without any early withdrawal penalty assessment.

The Internal Revenue Service indicates that the authorized payee assumes responsibility for income taxes on the funds received, though putting the money directly into another retirement account may avoid this at the time of receipt.

How a lawyer can help

Washington law makes the QDRO a fairly complex, time-sensitive document – with specific language requirements and deadlines to submit to the court. If you stand to receive a portion of your ex-spouse’s retirement or pension benefits, you will most likely need a QDRO in order to receive these benefits. Consulting with an experienced family law attorney about your situation is an important first step.