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Can you avoid taxes and penalties when splitting a 401(k) in divorce?

On Behalf of | Mar 14, 2021 | Property Division

The biggest assets are often what couples fight about when they divorce. Rather than arguing about an easily replaceable television, you are likely to concern yourself with belongings with substantial value, like your home and any investment accounts.

Retirement accounts funded during a marriage can also become a focal point for contention between spouses in their divorce. The chances are good that you will have to at least share some of the value of these accounts accrued during the marriage with your spouse. Will you have to worry about paying taxes and/or penalties in addition to splitting the account with your spouse?

With proper planning, you can avoid penalties

One reason that 401(k) and other retirement accounts with tax incentives have penalties is to keep people from making unnecessary withdrawals. Facing a significant penalty can be enough of a motive for someone to leave the funds in their retirement account instead of pulling them out when they want to access the money.

In a divorce where the courts order you to split an account with your spouse, you have no choice about the timing. Thankfully, the government recognizes that divorce can push people to divide retirement accounts. Provided that the court approves a Qualified Domestic Relations Order (QDRO), the couple divorcing can potentially avoid penalties, taxes and fees when the plan administrator divides the account in accordance with the QDRO.

Your family law attorney can help with drafting a QDRO and negotiating the division of retirement benefits. They can also help you understand your rights and obligations under the law and make the entire property division process easier to manage.