With the rate of divorces for those over the age of 50 doubling since the 1990s, there is a chance that you could also find yourself in the position where you’re ready to split from your spouse. If you’ve decided to split up, you will need to consider your future finances carefully.
You should know that there are highly specific rules for splitting your 401(k) plans, for example, which you will need to follow to be fair and to avoid penalties for early withdrawals. Here’s a little more about your 401(k) plan and how you can divide it.
Get a qualified domestic relations order
The first thing you should know about splitting up a 401(k) is that you’re going to need a qualified domestic relations order. This is an order that shows that a divorcing spouse has the right to receive a portion of that plan.
The QDRO is submitted to the plan’s administrator, who will then assist in transferring a portion of the assets to the divorcing spouse.
Is it expensive to split a 401(k)?
Normally, you would pay a penalty to take an early withdrawal while under the age of 59.5. However, when you’re splitting a 401(k) because of divorcing, then you’ll get a break. If you take out a portion of that money to support yourself, you’ll have to pay taxes but not the 10% penalty. If you roll that 401(k) into a new or established IRA, you won’t have to pay any taxes on the account. You also won’t have to pay a penalty fee.
If it is your 401(k) that is being split, remember to take your spouse off as the beneficiary (unless you would like to keep them as the beneficiary for some reason).
It can take time to go through this process of dividing a 401(k), and you will want to make sure that it’s the right option for your finances in your divorce. If you don’t want to divide a retirement plan, you may be able to buy out your spouse with cash or give them other assets (or vice-versa, if you’re on the receiving end).