Throughout your working years, you have built up a huge nest egg of retirement savings, probably a joint account with your spouse. However, what happens to this 401k plan if you go through a divorce? If you undergo a divorce, your spouse and any dependents are eligible for a share of your 401k retirement savings. The court settling your divorce will issue a statement called Qualified Domestic Relations Order (QDRO) that will clearly state how much of your 401k nest egg will be given out, when it will be paid out and how the division of retirement assets will occur.
A Qualified Domestic Relations Order (QDRO) is a court decree that states the beneficiary of your retirement nest egg other than yourself. This other person is also known as the alternate payee. The alternate payee can be your spouse, dependent, child or your former spouse. The QDRO defines the characteristics of how all of these payments will be distributed:
- Child support payments
- Alimony payments
- Property ownership
It is always a good idea to ask your 401k administrator if there is a model QDRO form incase of any situations like these that arise. The retirement assets distributed from your 401k plan are NOT subject to the 10% early withdrawal penalty fee if it is established and carried out properly. However, if the QDRO is NOT established and carried out properly, you will be subject to the 10% early withdrawal penalty. Beware, you do not want to be taxed on money that is no longer yours!
What Information does the QDRO hold?
- Your name and mailing address
- Name & address of the alternate payee
- The percentage of retirement savings to be distributed to the alternate payee
- The formula used to determine this distribution
- The # of payments & method of payment
Verify Your Qualified Domestic Relations Order (QDRO)
If you undergo a divorce and if your 401k plan assets are subject to a QDRO, you should provide your 401k administrator with either the original court order or a certified copy. The administrator will then carry out the order in this manner:
- Notify you and the alternate payee that the QDRO has been received and is being processed.
- Determine within a reasonable amount of time (maximum 18 months) if the QDRO is valid and legitimate.
- Determine any payments to be made to the alternate payee during the evaluation process.
- Notify you and the alternate payee whether the QDRO is valid.
Division of Retirement Assets upon Divorce
How the division of your 401k nest egg is carried out depends on the State you live in. However, most States have equitable distribution rules where any retirement assets saved up after marriage will be divided by a 50-50 ratio. Other factors such as length of marriage and each individual’s contribution also come into play.
Note: If you live in a State that has community property laws, you will face a 50-50 distribution rule of retirement assets. The list of these States is:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin