For many people, their retirement savings may account for the largest share of their financial assets. When getting divorced, these precious funds may well end up shared between both spouses.
Divorcing spouses should learn how to protect themselves against losing a significant portion of their hard-earned money to early withdrawal penalties and income taxes when splitting a retirement account with a partner in a divorce.
How 401K distributions work
As explained by the United States Department of Labor, a 401K or other employer-sponsored retirement account is established in one person’s name only even if it is ultimately deemed a marital asset in a divorce. Distributions from a retirement account should ideally happen when the account owner meets the criteria for retirement. This includes being of a certain age. These distributions go directly to the account owner.
Distributions from a 401K account prior that do not meet the retirement criteria may be subject to penalties and taxes that ultimately reduce the amount of money a person actually receives.
How a qualified domestic relations order works
A qualified domestic relations order establishes the account owner’s spouse as a payee on the 401K. This allows distributions from the account to flow directly to the spouse. Early withdrawal penalties are avoided and income tax responsibility for the distribution transfers from the account owner to the spouse who receives the money.
This information is not intended to provide legal advice but is instead meant to give divorcing residents in Mississippi an overview of what a qualified domestic relations order is and how it may help facilitate the division of their retirement account in a divorce.
