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Know the process for dividing a 401(k) when finalizing a divorce

On Behalf of | Jun 12, 2022 | Divorce

If you’re getting divorced in New Jersey, you may need to split your assets. Performing this task can be complex, especially if you have been married for many years. Learning more about distributing a 401(k) in a divorce is essential to ensure you get your fair share.

Dividing your 401(k) when getting a divorce

If you have a 401(k), it will likely need to be divided when you file for divorce. This action should be completed carefully as there are tax consequences and withdrawal penalties to contend with. You’ll need a court order to divide your 401(k). A judge must sign off on a Qualified Domestic Relations Order (QDRO) to release your funds. Doing so confirms you and your spouse’s right to this asset.

Following state law is essential when dividing assets

As a non-community property state, the assets accumulated before and after your marriage aren’t automatically split 50/50. Following state law dictating division rules is necessary to know how much each spouse should receive.

Distribution options

When the funds of a 401(k) are distributed after divorce, these three options are used for getting the money:

  • It’s rolled into another qualified retirement plan using direct transfer.
  • The distribution is deferred until the account owner retires.
  • The distribution can be cashed out.

With the third choice of cashing out the distribution, it can be costly if income taxes and an early withdrawal penalty is required. Obtaining a QDRO can help the account owner avoid these expenses.

Working out an agreement

When possible, it’s best if you can work out an agreement specifying the amount each spouse will receive. Agreeing on this independently makes the process much easier to complete.

Understanding the options for distributing a 401(k) when finalizing a divorce can be critical. Being armed with information can help ensure you don’t make a costly financial mistake.