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← 401K Plan is Tax-deferred! Relevance of QRDO (Qualified Domestic Relation Order) to the 401K Plan →

Divison of 401K Plan Assets in Case of a Divorce

January 23rd, 2008 · 37 Comments

  

An employee saves a considerable amount in long term by contributing towards his 401k plan. Usually, the employee withdraws his accumulated plan assets after retirement. There are certain other causes which compiles the employee to withdraw his plan assets prematurely. Divorce is the one of the aspects of such causes. What I mean is that an employee, who has been ordered by a court of law to separate from the family through a QDRO (Qualified Domestic Relation Order), has to pay portion of 401k plan assets to his divorced spouse or dependents. The method of your 401k plan assets division –like how much portion, when to pay and what assets to be effected for division- will be ordered by the court of law.

In simple words, Qualified Domestic Relation Order is an order, decree or judgment of the court of law which nominate some other person(s) as beneficiary of the 401k assets of the employee, other than the employee himself. This nominated person is referred to as alternate payee. Employee’s spouse, dependents and children fall under this category. The QRDO is helpful in asset disbursement in divorce cases for settlement of payments of property rights, alimony payments and payments for child support. Ensure from your plan administrator whether your plan incorporates model QRDO form, especially if a divorce proceeding is pending or contemplated against you. Early action on this aspect helps you in saving time and money at later stage.

The only consolation you get when you are ordered by a court of law to pay portion of your 401k plan assets is that withdrawal from 410k plan under this circumstances is exempted from 10% penalty tax, which you would have to pay if you are making early withdrawals from 401k plan in normal cases. Be cautious. A lay man may be confused about a court order for divorce and a QRDO. If you fail to establish the QRDO properly, you may be subjected to pay 10% penalty tax on early withdrawals from your 401k plan. This is a situation when you have to pay taxes on a huge amount, in fact which is no longer yours. Before making early withdrawals from 401k plan for disbursing payments to divorced spouse, children and dependents, as ordered by the court of law, examine the QRDO carefully. Ensure that the QRDO is verified correctly and correctly created. This will help you in deciding whether the QEDO is acceptable under the 401k plan early withdrawals. This confirmation of QRDO is important for preventing others to access your 410k plan assets illegally and to obtain tax exemption on withdrawal.

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