During a high-asset divorce, a California couple can face challenging issues related to retirement accounts. As a community property state, California provides for marital assets to be divided evenly, and retirement accounts such as 401(k)s are included. If such an account is to be included as property division is considered, then proper handling is crucial for ensuring that the funds are accessed legally without the creation of serious tax consequences.
The early removal of funds from a 401(k) may normally lead to incurring a 10 percent federal income tax penalty. Proper handling of a withdrawal to satisfy a court order in connection with a high-asset divorce begins with provision of the qualified domestic relations order to the administrator of the plan. An original or court-certified copy is needed, and with this document, the administrator will initiate the actions needed to handle the payment or division of the fund. The QDRO should include accurate information, including the name and address of both the individual holding the account and the payee. Clear information about the percentages and payment periods should also be provided.
An individual who will receive 401(k) funds because of a divorce settlement may have different options for dealing with the proceeds. In some cases, cash is helpful for getting back on one’s feet during a new stage of life. In other cases, it may be beneficial to roll such funds into one’s own 401(k) account. Some individuals might even arrange for leaving funds in an ex-spouse’s account, having the administrator separate it for personal management.
In deciding how to deal with 401(k) funds to be received in a divorce settlement, an individual might want to discuss the options with a financial advisor or lawyer. The assistance of such individuals might also be helpful if there is a suspicion of hidden high-value 401(k) accounts.
Source: 401k.org, “401(k) and Divorce“, December 24, 2014