Divorce Options, Divorce Solutions

How divorces force the split of 401(k) assets

On Behalf of | May 25, 2023 | Divorce

In New Jersey, contributions that you or your spouse made to employer-sponsored 401(k) retirement plans during your marriage count as marital property. To settle your divorce, you must divide the 401(k) funds in either of your accounts labeled as marital property. The division does not necessarily have to be an even 50/50 split, but it can be.

Privately negotiated division

You do not have to leave the division of your 401(k) assets in the hands of a judge. You and your estranged spouse may decide together how to split the funds. Before beginning this conversion, contact your retirement plan administrator. The administrator will explain how the plan manages withdrawals related to divorce.

Court-ordered division

When two people cannot reach an agreement about dividing the retirement funds, the matter will have to go before a judge. A judge will examine issues, like length of marriage and the financial situations of each person, before making a decision about who gets how much.

QDROs and tax consequences

Whether you negotiate the terms or a court orders them, you must obtain a Qualified Domestic Relations Order. This document explains exactly how you intend to split the assets. A judge must sign this order, and then it goes to your retirement plan administrator for approval.

Upon approval, the plan administrator distributes the money unless the plan rules prohibit withdrawals before retirement. In that case, the assets remain in the fund until you reach retirement age.

However, if you receive cash and you have not reached age 59 1/2, then you need to roll the money into another retirement plan right away. This move insulates you from a 10% early withdrawal fee. If you choose to keep the money instead, then you will pay the withdrawal penalty and income taxes.