How to divide a retirement account in a divorce
If a Florida couple needs to divide a 401(k) or another type of workplace pension plan as part of a divorce agreement, they will also need to get a document known as a qualified domestic relations order. A QDRO allows for a distribution in case of divorce without incurring taxes or penalties.
Because errors can be costly, a QDRO must be carefully prepared. It should be created in consultation with the plan administrator and reviewed by the couple and their attorneys to ensure that it reflects the divorce agreement’s intent. The QDRO should also indicate whether a person is going to receive the distribution directly or roll it over into an IRA. In the former situation, the receiver will need to pay regular taxes on the distribution.
The recipient of a 401(k) should not agree to be removed as their spouse’s beneficiary before the divorce is final. If they do and the spouse dies, they might receive nothing. The QDRO should also specify what percentage a person is supposed to get instead of the amount. This is because the value of the account could change.
Splitting an IRA does not require a QDRO. However, people should still make sure they roll the money over into another IRA to avoid having to pay income tax and an early withdrawal penalty for people younger than 59 1/2.
There are a number of other items that may need to be divided in a divorce as well. For example, a couple may own a home or share a bank account. They might have other investments as well. If one spouse had a significantly higher income than the other, this person might be required to pay alimony. People who are considering divorce might want to take their financial records to an attorney and discuss how the separation might affect them financially.