401k and DivorceDividing retirement in divorce can be complicated and frustrating. Many people spend decades saving for their post-working years and if their marriages do not work out, they may lose a substantial amount of this money. With record numbers of Americans, many of whom have retirement plans, divorcing at age 50 or older, understanding how these assets are divided is important.

According to a June 2012 article in The Wall Street Journal, one in every four divorcing Americans is at least 50 years old. This is a drastic increase from the less than one in ten Americans age 50 or older who divorced in 1990. Retirement plans account for a large portion of the assets held by Americans in this age bracket. Those with limited knowledge of divorce laws may find themselves with little money to live on during their golden years.

What is a Qualified Domestic Relations Order (QDRO)?

The Qualified Domestic Relations Order (QDRO) is the document that establishes the right of one former spouse to the retirement benefits of the other. This document also protects the owner of the retirement account from paying penalties for early withdrawal and income taxes on retirement assets that are transferred to the other party during a divorce. Divorcing couples are usually permitted to divide an account as they wish but a court will step in when they cannot agree.

An attorney should prepare the QDRO and submit it to the court for approval during a divorce proceeding. A court-approved QDRO is then provided to the 401(k) plan administrator. It details the calculations that should be used to divide the retirement assets. This includes whether each spouse is entitled to a dollar amount or percentage of the account balance. It also notes how the exes will share investment gains and losses prior to the transfer of funds.

Some family law attorneys recommend that the QDRO include a stipulation that the owner cannot take withdrawals or loans from the account until the money has been divided. This prevents the owner from receiving more than his or her fair share. When a QDRO becomes effective before the account owner retires, the non-owner ex may be awarded separate interest to ensure payment.

With so many complexities surrounding 401k and divorce, it is wise to obtain legal representation. This ensures that the owner of the retirement account is not taken advantage of while awarding a fair amount to the non-owner ex. Though each party will live separately, each may receive some money to make retirement more comfortable.

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