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Linda D. States

Dividing 401(k) funds properly during a divorce

There are multiple mistakes that California residents can make when dividing their 401(k) assets during a divorce. Unfortunately, oversights can result in high tax bills, excessive penalties and an unfair division of funds. To avoid making such mistakes, it is important that spouses are aware that the various types of retirement accounts are governed by different rules.

Workplace retirement plans, which include conventional pensions and 401(k) accounts, can only be divided through qualified domestic relations orders. Without a QDRO, an ex-spouse would not be able to legally access the portion of the funds to which they may be entitled.

Even though it is based on information in the divorce decree, the QRDO is a separate legal document. Therefore, the couple's attorneys should contact the retirement plan's administrator to verify the proper procedure for having a smooth transfer of the retirement funds. Before the document is filed with the court, it should be thoroughly reviewed to make sure that its contents are in line with what is stipulated in the divorce agreement. Multiple QDROs will be necessary if there is more than one retirement account that has to be divided as each account requires its own order.

Furthermore, the QDRO should stipulate if the 401(k) funds are to be moved to a rollover IRA. Since such a transaction is considered to be a trustee-to-trustee transfer, neither the recipient or the holder of the 401(k) account will be liable for any taxes.

A divorce attorney may advise clients about what steps to take to ensure that retirement assets are divided in a way that limits taxes and penalties. In addition, legal counsel could file the appropriate court documents regarding the division of the retirement assets.

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