If you and your spouse are planning to get divorced, or perhaps even in the midst of your divorce negotiations right now, you know that the two of you will have to come to a consensus on how to split up your joint assets and debts. For many couples, their retirement savings represent a significant portion of their overall marital estate. Some people choose to keep retirement accounts intact in exchange for other assets, but some couples find that splitting their retirement accounts makes sense for them.
According to CNBC, when you make the decision to split a 401K with a spouse as part of the property division settlement portion of your divorce, you should not rely solely on your divorce decree to execute the split. Instead, you should ensure that you and your spouse use a qualified domestic relations order. It is only with a QDRO that you may transfer the designated funds from one account to the other party without paying early withdrawal fees.
Typically, any distribution from a 401K for reasons other than retirement would be subject to steep penalties and taxes, even if a divorce decree outlines such a transfer. But, with a QDRO, the distribution may be made penalty-free. If the money is rolled over into another qualifying retirement account, income taxes would also be avoided at the time of the transfer.
If you would like to learn more about how to evaluate your options when potentially sharing a retirement account with a spouse during a divorce, please feel free to visit the qualified domestic relations order page of our property division and divorce website.