There are many benefits to funding a 401(k). Professionals can reduce their taxable income for the year by making pre-tax contributions to the account.
Employers may agree to match a certain amount of contributions, which can increase the resources people have during their golden years. The funds in a 401(k) can supplement the pension or Social Security retirement benefits that people rely on during retirement.
When people who have saved for retirement choose to divorce, they typically need to divide their accounts. Is it possible to divide such accounts without facing major financial consequences?
A special document helps bypass penalties
The tax-deferred status of a 401(k) limits the use of the funds deposited in the account until the owner reaches retirement age. Even then, people have to claim the funds they withdraw as income. Larger withdrawals might push people into a higher tax bracket. At the very least, they have to pay income taxes based on the amount they withdraw.
Additionally, any withdrawals made prior to retirement age trigger a 10% penalty. Spouses can avoid both tax consequences and penalties by having a lawyer draft a qualified domestic relations order (QDRO).
This document requires the signatures of both spouses. They have to submit to the courts for the approval of a judge. After they present the QDRO to the professional managing the account, splitting the account without penalties is possible.
In many cases, spouses who pursue an uncontested divorce can set property division terms that don’t require the division of a retirement account. If splitting a 401(k) account is necessary, the right document can make all the difference. Learning more about the nuances of property division proceedings can help people preserve their resources during a divorce.