How Is a 401(k) Split in a Divorce?: How the Court Divides Retirement Plans

In divorce proceedings, 401(k) retirement plans are divided between spouses by the court. Typically, dividing a retirement plan is something that you are not allowed to do on your own, even if you and your spouse agree on how to split the funds. The courts generally consider a 401(k) to be marital property, provided that the funds it contains were paid into during the course of the marriage. For example, if you and your spouse were married for 20 years and you paid into a retirement plan for the duration of your marriage, the court will treat it differently than if you were married five years and paid in the majority of your retirement funds prior to meeting your spouse. Ultimately, your 401(k) will thus be divided by a judge according to your state’s marital property laws, which may be an even 50/50 split or may consider factors such as spouses' health and contribution to the marital income, home, and family.

When deciding how to divide 401(k) funds, the judge will look at factors such as the length of your marriage, each spouse’s income and assets, as well how the rest of your marital property has been divided. If you live in a community property state, the 401(k) will be split 50/50 between the two spouses equally, without consideration of other factors. In an equitable distribution state, the court will consider extenuating factor, such as the other spouse's earning potential and health. In rare instances, a 401(k) distribution may be made in the name of a couple’s minor child instead of the second spouse--for example, in cases where both spouses have adequate retirement income and the minor child has an illness that will never allow him or her to live independently.

In order to legally redistribute the funds from a 401(k), the judge must enter a qualified domestic relations order, otherwise known as a QDRO. The QDRO will outline exactly how much money will be paid out to the second spouse, as well as a timeframe in which the funds must be distributed. It also must specifically name the payee to whom the funds will be distributed. If you have more than one 401(k), they may be included in the same QDRO. When the court issues your QDRO, it may not be labeled as such. A divorce decree or property settlement agreement may function as a QDRO provided that it meets all of your state’s legal requirements.

You will need to provide the administrator of your 401(k) or your employer with a certified copy of the QDRO in order for the funds to be released to your spouse or minor child designee. The QDRO should reflect the terms of your specific 401(k) plan and you will be responsible for providing those terms to the judge and your spouse’s attorney. When filing your taxes the year after paying your spouse out of your 401(k), you will need to provide your account with a copy of the QDRO or else you will be assessed with an early withdrawal penalty, which can be a significant percentage of your retirement plan.

The spouse distributing the money from his or her 401(k) will not be subject to early-withdrawal penalties, provided that the court enters a QDRO that complies with your state’s property distribution rules and the requirements of your 401(k) plan. The receiving spouse will be liable for taxes on the distributed funds unless he or she rolls over the money into a qualified investment plan. Thus, if you are receiving retirement funds from a spouse's 401(k), it can be helpful to talk to a financial planner to ensure that you protect your assets.