Thinking about getting divorced? You may be considering alimony, child support, and property division in divorce but have you thought about how your retirement may be affected? Many couples who are thinking of divorcing never consider how this act can affect their lifestyles during the golden years. To prevent any surprises, learn more about what happens to a 401(k) plan during a divorce.
Are Retirement Plans Are Marital Property?
In many states, any type of retirement plan is considered a marital asset. This means that it may be subject to division during a divorce. For example, Florida statutes mandate a 50-50 division for retirement savings accrued between the date of marriage and filing of the divorce petition. A divorcing spouse is not usually pleased to learn that the other spouse will receive half of his or her retirement savings.
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Many spouses object to dividing retirement in divorce and look for a way around it. They may have their divorce lawyers propose alternative settlements. A court may agree to this but the other spouse may not, particularly if there is no other marital property to divide. It can be difficult to walk away from a marriage with nothing.
Retirement Plan Division in Divorce
Couples should be prepared to enter discussions regarding their 401(k) plan during divorce. The division of these assets can be complex and is typically determined by the plan guidelines. The proceeds may be transferred as a lump sum, with the other spouse receiving his or her portion once the final divorce judgment is decreed. More commonly, the receiving spouse will not get any money until the benefit would normally pay out.
A Qualified Domestic Relations Order, or QDRO, is necessary to divide a 401(k) plan during a divorce. In many cases, the retirement plan administrator must approve the QDRO before any payments may be made. A QDRO order issued during a divorce that took place decades ago may not be deemed adequate for 401(k) distribution when due because it was based on vague mathematical calculations or reflects other technical problems. In this case, the QDRO or final divorce judgment may need to be amended.
Divorcing spouses who are interested in a lump sum payout of a 401(k) plan during divorce should understand that this might incur fees and tax penalties. A QDRO transfers retirement funds directly between plans, eliminating these charges. If an alternative agreement is made, legal guidance is recommended to ensure that the spouse making the withdrawal and payment is not held unfairly responsible for the taxes and penalties.
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