How Can I Divide a Qualified Retirement Plan (e.g. 401k)?

Lee Rosen, retired divorce attorney and founder of the Rosen Law Firm, discusses divorce and qualified retirement plans.

How can I divide a qualified retirement plan, like the 401K? I’m Lee Rosen.

People come into our office with all sorts of ideas about how they’re going to divide their retirement plan. Some folks think that should take a loan against the plan and use the loan proceeds to pay off their spouse. Other people come in and think that they will simply figure out the value of their retirement plan and then distribute other assets with an equivalent value to the other spouse. Different people have different ideas, and I will tell you that we hear an endless stream of sometimes crazy ways of doing things, and sometimes those ideas are just simply bad ideas, because they either don’t properly convey the value, or they cause the spouse that has the retirement plan to incur a huge tax or tax penalty. So this is a very tricky area and you want to be very careful.

Basically, there are two good ways to divide a retirement fund. One is simply to do what’s called an In-kind Distribution; to figure out the value of the plan, give that to one spouse and give the other spouse assets of an equal value. Now that requires careful consideration of the tax consequences; you wouldn’t want to keep a retirement plan that will later be taxed and give away an asset of that value without factoring in the tax consequences; that would be hurting yourself if you were to do that. So you want to be careful with In-kind and carefully do the math.

Then the other way to do it, and this is the more common way, is to divide the plan using a qualified domestic relations order; it’s also known as a QDRO. This is a document that allows one spouse to transfer an interest and a plan to the other spouse; and to do it all without any tax consequences and to literally set up a separate account, for the other spouse with a retirement plan administrator, or with a different retirement plan administrator.

So how do you go about getting one of these QDROs that qualify domestic relations? Well they are orders of the court; they require the signature of a judge in order to have one. There is a process that you have to go through, where you have to file a law suit; it doesn’t have to be a hostile law suit, it can be a friendly action, simply for the purpose of getting the order in. A judge has to sign it and then you have to submit it to the retirement plan for them to approve it and make the distribution according to the terms.

Most people are going to get an attorney to do this for them, because there’s some running around through the court process and there’s some complexity in dealing with the document; but you should know that for a lot of these plans, the attorney that’s doing it, will simply go to the retirement plan and request a package of documents, that they will then use in order to jump through the required hoops. This is a complicated process, but in many instances, especially when we’re dealing with 401K’s, it’s made much simpler by the plan, who is helping to divide the assets, so that it doesn’t become overwhelmingly difficult for you or for the retirement plan.

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