For many couples going through a divorce, dividing their assets is a huge challenge. Among the assets, dividing a 401(k) retirement account can be a headache. Below is how a divorce 401k split works.

What Is A 401(K)?

It is a retirement savings plan offered to employees by their employers. An employee contributes a portion of their pretax income to this retirement account. This account can grow over time through investment gains. Employers may also offer matching contributions up to a certain percentage, in some cases. This further increases the account balance. However, withdrawals made before age 59 and a half may be subject to taxes and penalties.

How Is A 401(K) Divided in A Divorce?

Assets are typically divided according to the laws of the state in which a couple resides during their divorce. In community property states, all assets acquired during the marriage are generally considered community property. They are split equally between the spouses. But, in other states, assets are divided fairly but not necessarily equally. The judge considers certain factors including the duration of the marriage and each spouse's income and financial

contributions. Any other relevant factors to determine a fair division of assets are also considered.

So, What Is QDRO?

A QDRO is a legal document that establishes the ex-spouse's right to a portion of the retirement account. It must be prepared and approved by the court and the plan administrator of the 401(k) account. The QDRO will specify the percentage or dollar amount of the 401(k) balance that the ex-spouse is entitled to receive. Once the QDRO is approved, the ex-spouse can either roll over the funds into their own retirement account or receive a cash payout.

But, there is a catch. Ex-spouses who opt to receive a cash payout are generally subject to taxes and penalties on the amount withdrawn.

What Factors Are Considered When Dividing A 401(K)?

Several factors come into play when dividing a 401(k) in a divorce. These include:

• The Length of The Marriage

The duration of the marriage is among the most significant considerations. Generally, the longer the marriage, the more likely the 401(k) will be regarded as a marital asset. Consequently, this will make it subject to division.

• Contributions Made During the Marriage

Contributions made to the 401(k) during the marriage are also considered marital property.

• The Vesting Schedule

The vesting schedule, which determines how much of the account balance is actually owned by the employee, is another factor to consider. If the employee is not fully vested, the non-vested portion may not be subject to division.

QDRO Approval

Once the QDRO is prepared, it must undergo a review and approval process by the plan administrator and the court. But, the plan will not be approved if the QDRO does not meet the specific plan requirements. Therefore, it is crucial to ensure that the QDRO is properly prepared and submitted.

Distribution Of 401(K) Funds

Finally, the funds in the 401(k) can be distributed to the non-employee spouse's account following the approval of the QDRO. Also, the non-employee spouse cannot access these funds until the employee spouse qualifies to withdraw them. They will just have to wait until the employed spouse is eligible to withdraw the funds.