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Handling 401(k) accounts in a divorce

| Jan 2, 2015 | High Asset Divorce |

Many Florida workers have 401(k) accounts. It may intrigue them to know that, during a divorce, this kind of retirement account may be considered a marital asset, thereby subjecting its accrued contents to distribution between the divorcing parties.

Although the laws governing these retirement accounts normally provide a penalty for early withdrawal, which is significant enough to deter many account holders from touching their 401(k) before the trigger age, this penalty may be temporarily lifted after a Qualified Domestic Relations Order indicating that an ex-spouse has legally acquired partial ownership of the account’s funds has been verified. This order, often referenced by its acronym, QRDO, is issued by the court presiding over the divorce, and it specifies the portion of the 401(k) belonging to the ex-spouse. The account’s new beneficiary may then withdraw his or her assigned portion without penalty in a cash lump sum, which is subject to taxes.

However, withdrawal is not required. Some new beneficiaries opt to leave their portion to grow with the rest of the account. Doing so subjects them to the standard penalty fee should they subsequently withdrawal their portion of the 401(k) before their ex-spouse reaches the trigger age, six months shy of turning 60.

Retirement accounts can be complex in both their constitution and their governing rules and regulations, and a 401(k) account is no exception. Fully aware of this, many divorcing couples obviate the need to divide their retirement funds through a pretrial settlement agreement, facilitated and approved by each party’s divorce attorney. Oftentimes, spouses waive their right to a portion of that particular marital asset in exchange for a greater percentage of other assets.

Source: 401k.org, “401(k) and Divorce,” accessed on Dec. 30, 2014

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