If you have put years into saving money in your 401(k), you naturally will worry about the fate of your account if you and your spouse decide to end your marriage. If your spouse has an entitlement to some of the money in your account, you will have to make sure your spouse receives his or her share of it.
There are a number of possible fates for your 401(k) in divorce. Splitting off your spouse’s share may be inevitable. However, you might choose an option that will be easier and save you some money that you might have otherwise lost on penalties and taxes.
Divide up the 401(k)
To split up a 401(k) in divorce, you need to secure a Qualified Domestic Relations Order from a judge. This is a separate order from a divorce settlement. By using a QDRO, you can avoid taxes and penalties from withdrawing money from your 401(k) too early. This option may not be a complicated matter to pursue but it will likely involve a strong understanding of your account to carry out.
Roll funds into an IRA
Kiplinger explains that instead of dividing the 401(k), an alternative is to roll the funds into a separate IRA account for your spouse. This option works if your spouse is over 59 and a half years old or if your spouse has left an employer. Utilizing this option can avoid tax liabilities and penalties and allow your spouse to direct the account as she or he sees fit.
Negotiate to keep the full 401(k)
It is possible you might work out an agreement with your spouse to keep the full 401(k) as long as you give your spouse some assets of equal value. This will require some negotiation, but it can work. Be aware that your spouse may want more than the account is currently worth if your spouse wants to factor in your 401(k)’s growth potential.
Liquidate the 401(k)
A full cashing out of your 401(k) is an option, but not one that you may want to pursue. This will likely involve paying income taxes on the withdrawn money and a penalty tax for early withdrawal. It is also not a given that you would qualify to liquidate your account or that you would receive legal approval to do so. Seeking out one of the aforementioned alternatives may be of greater benefit.