If you are getting a divorce and need to give your soon-to-be-ex-spouse part of your 401K, IRA or other retirement accounts, there are methods which will protect you from paying the early (before age 59 ½) withdrawal 10% tax penalty in addition to the income tax due at the time of withdrawal. Your ex-spouse can either:
- Become a co-beneficiary of your existing plan and have a separate account under the same administrator,
- Roll over the money into an existing IRA without paying any taxes.
One of the methods used for some types of accounts is called a QDRO or Qualified Domestic Relations Order. A QDRO is the legal order included in your divorce agreement that splits the contents of a retirement plan in order to give your spouse his or her share of the asset.
When your ex-spouse starts withdrawing from her/his account at 59 ½ or later, he or she will have to pay the income taxes due on his or her share of the plan, leaving you to pay taxes only on your own share.
If you entered into the Plan before the date of the marriage, only the portion acquired since the commencement of the marriage would be considered marital property and subject to equitable distribution.
If you entered into the Plan after the date of the marriage, then the total amount of the funds would be considered marital property and shared with your spouse.
As you are working through all the different aspects of your divorce, whether you have a 401K or other types of retirement accounts,
- Ask the administrator of your account what system and rules are applicable to your type of account.
- Make sure to find the specialized financial professional who can do the appropriate calculations to divide up your plans for you, saving you unnecessary tax consequences.
Your divorce mediator can help you through this process and recommend the right financial professional.
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