Your divorce will change many different areas of your life, including your financial stability and…
Splitting 401(K) Plans Correctly
By Hiral Atha
One of the many issues that Kansas couples may face during divorce involves dividing retirement assets. During this process, they should be very careful as different retirement accounts have their own sets of regulations. Dividing the funds in the wrong way may result in very high penalties and taxes as well as unintended allocations to an ex-spouse.
A qualified domestic relations order is required to divide workplace retirement plans, including traditional pensions and 401(k) plans. Using the legal order is the only way a spouse may legally obtain their share of their ex’s workplace retirement plan.
The order should specify whether the 401(k) funds will be distributed directly to the recipient or transferred into a rollover IRA. Individuals should be aware of the tax consequences of receiving the funds directly as they will have to pay taxes on the amount they receive. There is no tax assessed if the funds are moved to an IRA account because the transaction is considered a trustee-to-trustee transfer.
The QDRO should be carefully reviewed by an attorney to ensure that its contents reflect what is stipulated in the divorce decree. If there are multiple retirement plans that have to be divided, a separate QDRO will have to be completed for each account. Before any funds are moved and after the order has been submitted to the court, the order will have to be approved by the 401(k) plan administrator.
A divorce attorney may protect the interests of clients during disputes regarding property division. If necessary, litigation could be used as a last resort.