Property division is often one of the most challenging parts of going through a divorce, particularly for those who have considerable assets. While the home is often one of the largest assets, retirement accounts might also be valuable.
If a 401k is part of your divorce, it must be handled precisely so that there aren’t unnecessary fees or taxes due. Typically, a 401k is handled using a qualified domestic relations order (QDRO). This provides clear instructions about how to divide this retirement account. Without a properly drafted and approved QDRO, the plan administrator can’t distribute funds to anyone except the account holder.
How does a QDRO work?
A QDRO must include information about the plan, the account holder, the person who the distribution is going to and the method of distribution. It can only distribute assets that are available in the 401k. The distribution for a 401k is typically done in a lump sum. Certain pensions may also be divided using a QDRO, and those may have regularly occurring payments to the alternate payee.
The QDRO will contain either a dollar amount or a percentage of the account that has to be paid to the alternate payee. The terms of distribution must be presented to the court. If the court approves the plan, it will go to the plan administrator, who will either approve the QDRO or send it back for revisions. The funds are only distributed to the alternate payee once the QDRO is approved by the court and the plan administrator.
Working out the terms of a high-asset divorce can be challenging. It’s best to work with someone who understands the circumstances so they can outline the options and help with the process.