For many couples, their joint retirement savings may include multiple accounts or types of investments. When a couple gets a divorce, dividing these assets may raise many issues.
Even when retirement savings must be split between two spouses, how this occurs may play into how much each person receives or loses.
401K accounts and the QDRO
A spouse who owns an employer-sponsored 401K account may need to pay early withdrawal penalties when taking a distribution prior to reaching the age of retirement. These penalties may be assessed even if the distribution occurs per the agreement listed in a divorce decree when the account owner gives the money to a former spouse.
According to the U.S. Department of Labor, however, the use of a qualified domestic relations order may avoid the assessment of the early withdrawal fees by naming the spouse as an authorized payee on the account. Funds flow directly to the authorized payee, bypassing the account owner altogether. The authorized payee also avoids the early withdrawal fees thanks to the QDRO.
IRAs and pensions
A QDRO may facilitate the division of a pension, but not an individual retirement account. Other agreements may be used when splitting an IRA.
Taxes and 401K splits
Upon receiving money from a former spouse’s 401K per a QDRO, an authorized payee may put the money into another retirement account. This avoids the immediate assessment of income taxes on the money. If the authorized payee simply receives the funds without reinvesting them into retirement savings, he or she may need to pay income taxes on the amount received.
