Throughout your working years, you
have built up a huge nest egg of retirement savings, probably
a joint account with your spouse. However, what happens
to this 401k plan if you go through a divorce? If you
undergo a divorce, your spouse and any dependents are
eligible for a share of your 401k retirement savings.
The court settling your divorce will issue a statement
called Qualified Domestic Relations Order (QDRO) that
will clearly state how much of your 401k nest egg will
be given out, when it will be paid out and how the division
of retirement assets will occur.
A Qualified Domestic Relations Order
(QDRO) is a court decree that states the beneficiary of
your retirement nest egg other than yourself. This other
person is also known as the alternate payee. The alternate
payee can be your spouse, dependent, child or your former
spouse. The QDRO defines the characteristics of how all
of these payments will be distributed:
-
Child support payments
- Alimony payments
- Property ownership
It is always a good idea to ask your
401k administrator if there is a model QDRO form incase
of any situations like these that arise. The retirement
assets distributed from your 401k plan are NOT subject to
the 10% early withdrawal penalty fee if it is established
and carried out properly. However, if the QDRO is NOT established
and carried out properly, you will be subject to the 10%
early withdrawal penalty. Beware, you do not want to be
taxed on money that is no longer yours!
- Your name and mailing address
- Name & address of the alternate
payee
- The percentage of retirement savings
to be distributed to the alternate payee
- The formula used to determine this
distribution
- The # of payments & method of
payment
If you undergo a divorce and if your
401k plan assets are subject to a QDRO, you should provide
your 401k administrator with either the original court order
or a certified copy. The administrator will then carry out
the order in this manner:
- Notify you and the alternate payee
that the QDRO has been received and is being processed.
- Determine within a reasonable amount
of time (maximum 18 months) if the QDRO is valid and legitimate.
- Determine any payments to be made
to the alternate payee during the evaluation process.
- Notify you and the alternate payee
whether the QDRO is valid.
How the division of your 401k nest
egg is carried out depends on the State you live in. However,
most States have equitable distribution rules where any
retirement assets saved up after marriage will be divided
by a 50-50 ratio. Other factors such as length of marriage
and each individual's contribution also come into play.
Note: If you live in a State that has community property
laws, you will face a 50-50 distribution rule of retirement
assets. The list of these States is:
-
Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
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