Whether getting divorced when retirement may be just around the corner or with many years left to work, a person may need to split the assets in a retirement account with a spouse to satisfy a property division settlement.
It may seem logical to the 401K account owner that he or she should withdraw money from the account and pay the former spouse. That approach, however may well lead to the loss of even more retirement assets.
401K withdrawals and divorce decrees
A couple’s property division settlement is among the many agreements detailed in a divorce decree. That decree, however, may not be sufficient documentation with which to take action when it comes to splitting a retirement account.
As explained by the United States Department of Labor, withdrawals from a 401K or other employer-sponsored retirement account for reasons other than retirement may be subject to early withdrawal penalties, including payments to a former spouse per a divorce agreement.
The qualified domestic relations order
A qualified domestic relations order adjuncts a divorce decree and allows a person’s spouse or former spouse to be authorized to receive distributions from his or her 401K account per a divorce agreement. The QDRO must receive approval from the 401K plan administrator. Once this happens, distributions may be made to the authorized payee with no early withdrawal penalty assessment to the account owner or the authorized payee.
Taxes on QDRO payments
The Internal Revenue Service indicates that an authorized payee assumes responsibility for the income taxes on payments made pursuant to a QDRO. Reinvesting into another retirement account upon receipt eliminates the need for immediate tax payment, however.