If you are in the midst of a divorce, you know that your assets and property
are about to end up on the chopping block. Splitting up your checking
account might be relatively straightforward, but dividing a 401(k) account
is far less black and white. You might not be thinking about retiring
now, but safeguarding your future is important. Here is what you need
to know about splitting your 401(k) in a divorce:
1.You will need a court order: You cannot simply pull money out of your 401(k) account or you will end
up facing a withdrawal penalty and taxes. To properly split your 401(k)
account, you will need a Qualified Domestic Relations Order (QDRO), which
will confirm each spouse’s right to a portion of the money, letting
you off the hook for the aforementioned penalties and taxes. If you also
happen to have a pension or other employer-sponsored plan, you will need
separate orders for each account. However, you do not need a QDRO to split
an IRA. There is a separate process for that, which is called “transfer
incident to divorce.”
2.State law will determine how it is divided: Colorado is an equitable distribution state, which means the court will
look at certain factors, such as the financial situation of each spouse,
ability to earn income, and the duration of the marriage to determine
how to divide their assets.
3.Distribution options: If you are on the receiving end of a 401(k), there are a few different
ways to obtain the money. You can roll the assets over into your own qualified
retirement plan through a direct transfer, defer taking the distribution
until your former spouse retires, or you can cash out your portion. Cashing
out might seem like an interesting option, but it can be costly. If you
are not 59 ½ years-old at the time of the payout, you could end
up paying income taxes and a 10% early withdrawal penalty.
4.Work it out yourselves: Sure, your state has rules on how to divide assets, but this does not mean
you and your spouse cannot work it out yourselves. If you believe you
can both see eye to eye on this issue, try to negotiate with your attorneys
present or with the assistance of a mediator. It will save you time and money.
Denver Family Law Attorney
If you are going through a divorce, heated or amicable, no case is too
complex or challenging for us. The Moodie Law Firm is focused on providing
professional, prompt, and personalized representation to clients in Denver
and surrounding communities.
Contact our office today at (303) 578-3940 to schedule a consultation with
a knowledgeable member of our team.