401K Divorce Settlement

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Divorce implies legally terminating a relationship and saying adieu to all the memories attached to it. Although it is not easy to take a divorce, people take this step when there is no solution left to their problems. The decision of divorce should not be taken in a hurry as there is no turning back once the papers are filed. Most of the people commit this mistake of taking divorce without evaluating its outcome and then they regret doing something of that sought. Children are the ones who suffer the most as they find it difficult to figure out what divorce means and why their parents are fighting. Divorce of parents can be a turning point in the lives of the children. Children might become over aggressive or can turn into an introvert, which plays a major role in shaping their future. 401K is a type of retirement savings plan that is popular in the U.S.A. Information about 401K divorce settlement is given below.

A 401K is a retirement savings plan. The individual, who has a 401K account, opts to transfer a part of their salary to their 401K account.(irrelevant) Till the withdrawal of this savings, the payment of income tax on the saved amount is postponed

Role of QDRO (Qualified Domestic Relations Order) in a 401K Divorce Settlement

Assume that an individual has saved some amount of money in the 401K account. Now, this individual is going through a divorce. During the divorce, it is probable that the ex spouse and / or any dependents may become eligible for the money in this account.

The QDRO (Qualified Domestic Relations Order) is an order, decree or judgment issued by a court. It is a part of the divorce settlement. This order explains how, when and what is the division of the money saved in the 401K account. The QDRO is utilized in the distribution of assets in a divorce settlement for property rights payments, child support payments and alimony payments. This order might order that the recipient of the money in the 401K account may be your spouse, your former spouse, your children or any other dependent.

Division of money in 401K Divorce Settlement

If the individual lives in a state that observes community property law, the money in the 401K account is divided in a 50:50 proportion, irrespective of how the other marital assets have been divided. Such a community property distribution is executed in the following states.

  • Wisconsin
  • Washington
  • Texas
  • New Mexico
  • Nevada
  • Louisiana
  • Idaho
  • California
  • Arizona

The remaining states adhere to equitable distribution of assets in a divorce settlement. In these states, the money in the 401K account may not be essentially divided in the 50:50 ratios. Some factors that are considered while distributing this money are as under.

  • Division of the other marital assets
  • The duration of the marriage
  • Contribution of each partner in marital life

Various options of 401K Divorce Settlement

The spouse who has received the money that was in his / her ex spouse's 401K account has the following options.

  • The money can be taken as cash. This cash can be utilized during the rough period of the divorce
  • If the spouse receives a lump sum amount, then the spouse would have to pay tax on the total amount. By this method, the spouse loses the investing and earning power of this money
  • The spouse can roll over this money into an IRA (Individual Retirement Arrangement) account. This is an account that offers tax advantages for retirement savings. Now, this spouse has more freedom of transaction as it is feasible to withdraw the money whenever desired
  • The spouse (payee) can make a stipulation in the QDRO agreement that the money may be kept in the former spouse's (payer) 401K plan. The administrator of the plan creates a separate account for such a spouse. However, only after the former spouse (payer) withdraws the money after his / her retirement, can the spouse (payee) be able to withdraw the money

It is when the things reach the stage of repair that the couples take the decision of divorce. Everyone has a certain limit to which he/ she can bear things but when things become unbearable, couples start finding ways of moving out of that relationship. 401K divorce settlement helps the couples in settling the money matters. For more information, the couples can take the help of the lawyers so that they do not commit any mistake during the process of divorce.

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