Retirement accounts have a great value during a divorce. These accounts exist in different forms. Most employers offer either a defined benefit plan or a defined contribution plan as a retirement benefit for their employees. An example of a retirement account is the 401K account. How to divide a 401K in divorce in California?
With a defined benefit plan, the employee does not contribute part of their paycheck; rather the employer makes the contributions. On the other hand, with a defined contribution plan, the employee contributes part of their paycheck into the plan, typically a 401(k) or a 403(b) plan.
How to Divide a 401k in Divorce – The Steps
Any monies invested into a 401k defined contribution plan during the period of marriage are classified as community property during a contested divorce. Each dependent spouse will have rights over equitable distribution of the community property value. Federal laws provide guidelines on how to divide a 401k in divorce for common-action spouses.
State laws determine how much each party receives based on the state’s community property laws. Dividing retirement plans when the couple divorces are quite common. It’s not complicated to split a 401k in a California divorce, however, you need to follow certain procedures based on the agreements between spouses.
When addressing how to divide a 401k between a collaborative divorce or legal separation, you need to have first completed the divorce process.
What Happens to the Order and Final Judgment?
You must enter the final judgment and the order when filing divorce documents. The judgment will give the plan description for the division of the 401K between the parties involved. Next, drafting and filing of a Qualified Domestic Relations Order (QDRO) take place. The QDRO serves as a formal court document that instructs the administrator of the 401k plan on how to divide the 401k plan between the parties.
The order will identify the number of retirement funds and life insurance policies in the account going to the other spouse. The division of the 401k must comply with the Employee Retirement Income Security Act. The judge will review the QDRO and, if everything is correct (including regular payments), they’ll enter the order.
The filed QDRO is then sent to the plan administrator to divide the retirement savings into two parts: the plan participant portion and the portion awarded to the alternate payee spouse in a separate process. You should know that the divorce decree alone doesn’t qualify one to divide the 401k. A lot has to be looked into within the savings accounts and future benefits.
When to File a QDRO
If your spouse retires prior to the finalization of the divorce settlement, it may affect the division of retirement benefits and also the division of retirement savings. It’s important to file the QDRO as soon as you file the divorce decree, or alternatively, file a joinder of the plan during the period of case settlement and certified divorce.
You shouldn’t delay filing a QDRO when dividing a 401k in a California divorce. Doing so may impact the amount of money a party receives not considering the type of retirement account. You need to seek advice from a financial analyst about the tax implications of dividing a 401k plan. Request a checklist and/or package of instructions from the plan administrator about their QDRO requirements.
Most Plans have specific criteria to incorporate into the Qualified Domestic Relations Order for the plan administrator to accept it. Lastly, it’s best to sign the QDRO and marital settlement agreement concurrently.
California 401k Divorce Distribution
The QDRO will designate the spouse receiving a 401k payout as the “alternate payee”. The alternate payee can collect their share of distribution in divorce by rolling the 401k proceeds over into their own retirement plan for retirement assets. In addition, the alternate payee can choose to leave their share intact and receive payments upon their former spouse’s employer-sponsored retirement plans.
The spouse can also choose to take a lump sum payout based on their contributions to retirement accounts. If the alternate payee spouse chooses to take a lump sum payout, they may receive a 10% withdrawal penalty if they withdraw the funds before reaching the age for common retirement (59 years). If both parties have a 401k plan, how to divide a 401k in divorce may depend on individual accounts in divorce.
How’s The 401k Shared During Divorce?
The parties may agree to a 50/50 split of each qualified retirement plan. If one party’s 401k balance is smaller than the other party’s, however, a simpler solution comes up with a common retirement plan. The parties may agree to offset the community property interest in the smaller retirement savings plan by simply having the other party take a smaller amount of the larger type of retirement plan (largest asset).
One party could also decide to accept other community property assets in lieu of receiving part of the 401k. The parties may want to get advice from a financial planner prior to determining the best way to divide the retirement accounts.
Contact A People’s Choice
Contact A People’s Choice for more information about how to divide a 401k in divorce and help with the QDRO process. We can help draft the paperwork needed to divide a 401k account as well as formally join the Plan, if necessary.
We offer an easy online interview to get the QDRO process started, making it easy and hassle-free. At A People’s Choice, we can prepare your dissolution of marriage paperwork in addition to the QDRO. Contact us for help by calling today at 800-747-2780 or using our convenient online inquiry form.