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Dividing a 401(k) in a divorce settlement

A person who is going through a high asset divorce in California might wonder what will happen to their 401(k) plan. Depending on the details of the divorce settlement that is reached, an individual will likely have to pay out a portion of the assets that they have in their 401(k) plan to their ex-spouse.

When someone is ordered to hand over 401(k) assets in a high asset divorce settlement, the court that made the decision will issue a qualified domestic relations order, or QDRO. The QDRO will detail what portion of the 401(k) is granted to the ex-spouse as well as when and how the assets should be paid. A QDRO is also used to divide other assets in a divorce settlement that may be used to make alimony or child support payments.

It is imperative that an individual ensure the QDRO is properly established prior to withdrawing assets from a 401(k) retirement account. A valid QDRO will ensure that the assets a person withdraws are not subject to a federal income tax penalty of 10 percent. If a QDRO does not include the payee's name and address, or if it is found to be invalid for another reason, the payer spouse could suffer a substantial monetary loss after taking money out of their 401(k).

Divorces involving significant assets can be incredibly complicated. To avoid losing money and property in a divorce, an individual might want to seek representation from an attorney. In addition to helping ensure that a person does not suffer from any unexpected tax penalties, an attorney may be able to assist an individual in protecting all their separate property from division.

Source: 401k.org, "401(k) and Divorce", December 31, 2014

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