Tips for dividing a 401(k) in a divorce

by | Jan 4, 2019 | Firm News

When a divorcing couple in Ohio needs to divide a 401(k), they must be careful to avoid potentially costly errors. A 2016 survey of the American Association of Matrimonial Lawyers found that pensions and retirement accounts were second only to alimony as the most contentious issue in a divorce.

A document called a qualified domestic relations order is necessary to divide a pension plan or a 401(k) in a divorce, and multiple accounts will require multiple QDROs. The QDRO must be consistent with the divorce agreement, specify how distributions will be made and get accepted by the plan administrator. If the distribution is rolled into an IRA, taxes will not be incurred. A direct distribution following divorce is exempt from the early withdrawal penalty but still subject to income tax.

There are a few other precautions people should take. Those who will be recipients of 401(k) funds should not allow themselves to be removed as beneficiaries until the divorce is final. If the account owner dies, one might not otherwise have access to the funds. Furthermore, the QDRO should state the amount to be divided in percentages instead of dollar amounts since the value of the account may fluctuate. IRAs do not require QDROs but have other rules that must be followed.

Negotiating property division as well as child and spousal support can be challenging for separating partners. There may be logistical complexities with 401(k)s and pension plans. An ex may also struggle with the idea of letting go of the family home or allowing their children to spend time with the other parent. However, legal counsel could help a client set priorities for negotiations.