Divorce becomes complicated the more assets a couple shares. While most couples will focus on the division of property and child custody, there is one issue many people tend to overlook: the 401(k).
A 401(k) is marital property. The spouses contribute to it, and similarly to buying a home together, it becomes open for division in the event of a divorce. Dividing a 401(k) can become messy, so it is important to prepare adequately and have an attorney assist you throughout the process.
A three-step process
There are three steps to divide a retirement account. First, the initial divorce decrees must explicitly order the division. Next, you and your lawyer will need to create an additional legal document known as a qualified domestic relations order (QDRO). You will need to provide this document to the administrator of the retirement account, and the document must contain details about how to divide it so that it remains in compliance with the Employee Retirement Income Security Act.
From here, the judge will need to approve and sign the order. At the end of it all, the former spouse will receive the designation of "alternate payee," which means that he or she can receive payments from the account.
Distributing the funds
There are several different ways a former spouse can receive payments through the account. The spouse can take money as a cash payment right off the bat or elect to receive proceeds into his or her own retirement account. Additionally, it is possible to leave the 401(k) intact until the person who owns it retires, at which point payments can come through.
Working out an independent agreement
It is possible for two divorcing spouses to reach an agreement on their own for various retirement accounts. However, it would work to both parties' best interests to still consult with a financial advisor and attorney to ensure everyone receives a fair share.