Part of sharing a life with your spouse is planning for a future together - a plan that might include a 401(k) or other retirement funds. But what happens when you decide to divorce and suddenly realize that your paths will diverge in the future, though your need for financial security remains the same?
Dividing retirement funds during a divorce can be both stressful and complicated but, luckily, there are laws in place that can protect divorcing couples from tax penalties and help them begin planning for their golden years after separation.
When dividing qualified retirement plans, such as 401(k)s, you will need a qualified domestic relation order (QDRO) to protect you against tax penalties and other issues. Often pronounced quadro this order will give a payee (one spouse) the right to some portion of the couple's retirement accounts.
Once the payee has a right to their portion of the retirement funds, he or she has several options:
Leave the funds where they are - in your spouse's account. If your 401(k) is performing well, or if you are not in need of immediate funds, a spouse may choose to let their funds be and continue to wait until retirement to access them.
Move the funds to an IRA rollover account. If you do not want to keep your portion of the retirement funds in the same place as your ex, you can choose to roll the funds into your personal IRA account. This option comes without any tax penalties.
Take a lump sum and roll over the remainder. This option is ideal for a person who may be suffering from cash flow issues because of the divorce. A person can take a portion of their retirement funds in cash (this money will be taxed) and roll the rest over into an IRA account (this money will not be taxed).
Cash your portion of the retirement fund. If you badly need financial support now, you can cash out your portion of the retirement plan. Just remember that this money is subject to heavy taxes, especially if you are under 59.5 years of age. In addition, remember that your retirement funds are meant to offer you financial stability down the road.
Do you have questions about the division of your retirement accounts during your divorce? Speak with a Washington State divorce attorney today about your questions and concerns.