Virginia residents and anyone else looking to divide a 401(k) in a divorce may need to tread carefully when doing so. Ideally, the account will be split with the assistance of someone who has knowledge of the qualified domestic relations order (QDRO). The order will need to be written carefully to ensure that it adheres to language included in the divorce decree itself. Funds are generally sent from one person’s 401(k) into a 401(k) in the other spouse’s name.
This is generally done through a trustee-to-trustee transfer as this avoids triggering a taxable event. In some cases, funds will be put into a rollover IRA or given directly to the recipient. If a person receives funds directly, he or she will need to pay income taxes while avoiding the 10 percent early withdrawal penalty. This penalty does not apply if an individual is 59½ years or older.
As a general rule, retirement funds should be kept in a separate account unless an individual has no other means to pay expenses. It should be noted that money in an IRA could be seized by creditors. Therefore, it may be best to keep the money in a 401(k) if at all possible. Regardless of how the money is distributed, it will need to be spelled out as part of the QDRO.
A 401(k) or other retirement accounts may be included in the property division process. Therefore, it may be beneficial for individuals with retirement savings to consult an attorney prior to getting divorced. It may be possible to learn more about how funds within the account can be transferred as well as the possible tax implications. This may make it easier to structure the transfer in a manner favorable to all parties.