401K Retirement Plans And Divorce

401k Retirement Plans

401k retirement plans are a very popular option, but what happens to your plan when you are going through a divorce? These plans are governed by many different rules, 401k contribution limits, and withdrawal allowances. An early withdrawal from your plan could result in a ten percent early withdrawal penalty from the IRS, but if the plan is divided as an asset during divorce proceedings this penalty will not apply as long as certain steps are followed. Your spouse, children, and any other dependents may be eligible for a portion of your 401k retirement plans, if it is ordered by the court during a divorce proceeding.

The early 401k withdrawal penalty will not apply as long as there is a Qualified Domestic Relations Order issued by the court that is valid and has been properly filled out and processed. This step is necessary for any division of your 401k retirement plans. This court order must be filled out with all of the correct information, including the percentage of your plan ordered to be turned over to the other party, your name and last known address as well as that of the alternate payee, the formula used to divide the account, and the number and amount of each payment ordered. None of your 401k benefits can be released by the plan without all of this information being correct and verified.

Any QDRO ordered by the court must be submitted to your plan administrator, and the orders relating to your 401k retirement plans must be verified before your account can be touched. A divorce could cost you half of your retirement plan, and this can include any 401k catch up contribution that you may have made as well as regular contributions. It is a good idea to consult an attorney, so you do not end up owing a tax penalty as well as losing up to half of your retirement savings. Even a small error can cause the early withdrawal penalty to kick in, and the tax consequences can be large.