Retirement accounts are usually one of the more highly valued assets in a divorce. There are also many different types of retirement accounts. Most employers offer either a defined benefit plan or a defined contribution plan as a retirement benefit for their employees. With a defined benefit plan, the employee does not contribute part of their paycheck; rather the contributions are made by the employer. 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. Any monies invested into a 401k defined contribution plan, while married, are usually deemed community property upon divorce. This means each spouse will be entitled to half of the community property value. Federal laws provide guidelines on how to divide a 401k in divorce. State laws determine how much each party is to receive, based on the state’s community property laws. Read on to learn more about how to divide a 401K in divorce

How To Divide a 401k in Divorce – The Steps

Dividing retirement plans in divorce is quite common. It is not complicated to split a 401k in a California divorce, however there are specific procedures that must be followed. When addressing how to divide a 401k in divorce, the divorce needs to be complete. This means that a final Judgment and Order must be entered. The Judgment will describe how the 401K is to divided between the parties. Next, a Qualified Domestic Relations Order (QDRO) will have to be drafted and filed. The QDRO is a formal court document that instructs the administrator of the 401k Plan how to divide the 401k Plan between the parties. The Order will identify how much of the account is being awarded 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, the Order will be entered. The filed QDRO is then sent to the Plan Administrator to divide the account into two parts, the plan participant portion and the portion awarded to the alternate payee spouse.

The divorce decree alone is not enough to divide the 401k. If your spouse retires prior to the finalization of the divorce, the division of the 401k may be affected. It is important to file the QDRO as soon as you file the divorce decree, or alternatively, file a Joinder of the Plan while the case is being settled. Contact A People’s Choice to help you prepare and file the necessary forms you need to divide your 401k or to formally join the Plan.

California 401k Divorce Distribution  

The QDRO will designate the spouse receiving a 401k payout as the “alternate payee”.  The alternate payee can collect his/her share by rolling the 401k proceeds over into his/her own retirement plan. In addition, the alternate payee can choose to leave his/her share intact and receive payments upon his/her former spouse’s retirement. The alternate payee spouse can also choose to take a lump sum payout. If the alternate payee spouse chooses to take a lump sum payout, they may be subject to a 10% penalty if withdrawn prior to 59. 

If both parties to the marriage have a 401k plan, how to divide a 401k in divorce may depend on the individual account balances. The parties may agree to a 50/50 split of each plan. If one party’s 401k balance is smaller than the other parties, however, there may be a simpler solution. The parties may agree to offset the community property interest in the smaller plan by simply having the party take a smaller amount of the larger plan. It may also be one of the parties’ best interest 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.

It is important not to delay in filing a QDRO when dividing a 401k in a California divorce. Doing so may impact the amount of money a party may receive. It may be important to advice from a financial planner about the tax consequences 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 that must be incorporated into the Qualified Domestic Relations Order for it to be acceptable to the Plan Administrator. Lastly, it is best to sign the QDRO and marital settlement agreement at the same time. 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 use our convenient online inquiry form.

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