Dividing 401(k) plans in divorce requires accuracy

When California couples reach the end of their marriages, dealing with the financial fallout can be some of the most complex and contentious concerns that come with the divorce. In many cases, one or both parties in the divorce may have significant retirement funds, which are frequently some of the largest and most important assets at stake, especially given the importance of these accounts for both spouses’ financial futures and security.

There are multiple types of retirement accounts, and they can be handled differently when divided as part of a property distribution settlement in a divorce. When the distribution is not handled according to the rules for that kind of account, both spouses can lose money due to taxes and penalties. In addition, when the division is handled inappropriately, an inequitable division can also result.

A QDRO, or qualified domestic relations order, is required in order to divide a retirement account that originates from one of the spouse’s workplaces. It’s needed whether the account is a defined-benefit pension plan or a 401(k) fund. The court does not issue a QDRO automatically as part of the divorce decree even though the text should be based on the agreement in the divorce. When more than one account is being divided, a separate order is needed for each one. It is also important that the QDRO specifically indicates whether the distribution is going to a new retirement fund or cash.

The family law attorney that handled the divorce can also draft the necessary orders and have them approved by the court in addition to working with the administrator of the retirement plan to effectuate the property division. A lawyer can provide not only strong representation in the divorce but also ongoing financial guidance in dealing with the issues raised by the asset division process.