If you divorce, your former spouse may be entitled to some of the assets in your 401(k) account or to a portion of the actual account. That depends on where you live, as the laws governing marital property differ from state to state.
In community property states, you and your former spouse generally divide the value of your accounts equally. In the other states, assets are typically divided equitably rather than equally. That means that the division of your assets might not necessarily be a 50/50 split. In some cases, the partner who has the larger income will receive a larger share.
To get a share of your 401(k), your former spouse’s attorney will ask the court to issue a Qualified Domestic Relations Order (QDRO). It instructs your plan administrator to create two subaccounts, one that you control and the other that your former spouse controls. In effect, that makes you both participants in the plan. Though your spouse can’t make additional contributions, he or she may be able to change the way the assets are allocated.
Your plan administrator has 18 months to rule on the validity of the QDRO, and your spouse’s attorney may ask that you not be allowed to borrow from your plan, withdraw the assets, or roll them into an IRA before that ruling is final. Once the division is final, your former spouse may choose to take the money in cash, roll it into an IRA, or leave the assets in the plan.
If there’s a cash settlement, income taxes will be due on the amount that’s taken out of the account. If your spouse gets the money, he or she is responsible for paying that bill. But if as part of the settlement, the money goes to your children or other dependents, you owe the tax.
| Community Property Rules The nine community property states, which require equal distribution of marital assets, are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. |
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