How can I split a 401(k) during a divorce?

Divorcing spouses in Tennessee should clearly understand the tax implications of splitting a retirement account as part of a property division agreement.

The thought of getting divorced can be one of the most difficult things to come to terms with for a Tennessee resident. Letting go of the hopes and dreams of a life together is never easy. To make things even harder, many people must also let go of some of their hard-earned savings and planned future income assets. Retirement accounts today are often split between spouses during divorce proceedings. While this does happen frequently, it must be done with care.

Non-traditional plan distributions open up new issues

Any retirement plan is established with the expectation of providing income for the plan owner at retirement. Because of this, taking money out for other uses at other times may result in some penalties. These penalties can come in the form of fees assessed by the plan administrator but also in the form of taxes.

Options to address these issues

When the agreement has been made to split the assets in a 401(k) with a spouse during a divorce, spouses do have an option to avoid the taxes and penalties discussed above. This comes in the form of a Qualified Domestic Relations Order.

According to the U.S. Department of Labor, a QDRO essentially names the non-plan-owning spouse as an authorized payee on the account. This then allows money to be distributed to this person. All distributions must be clearly detailed and itemized in the QDRO and must take place as identified. A single QDRO can be used to detail distributions from more than one 401(k) plan.

Recipient's responsibilities

Forbes cautions people against thinking that simply having a Qualified Domestic Relations Order in place is enough to guard against taxes when receiving money from a former spouse's 401(k).

Money received as part of a property division settlement or spousal support award must be reinvested into another qualifying retirement account in order to be free from taxes at this point. If this is not done, the recipient may be liable for taxes on all funds received.

Other uses for a QDRO

The Internal Revenue Service explains that a QDRO can establish a child or other dependent as an alternate payee. This may be useful for a person who needs to tap into 401(k) funds in order to satisfy a child support order. Any payments made for this purpose are taxed to the original plan owner.

Getting the facts up front is important

Clearly there are many potential concerns and things to know about how to manage distributions from retirement accounts during or after a divorce. People in Tennessee who are getting divorced should consult with an attorney to be sure they fully understand these things before proceeding.