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Considerations for 401(k) during a divorce

If you are one of the many Minnesota residents who have taken advantage of the investment a 401(k) offers, then you are wise. While going through a divorce, you may wonder how this asset should be divided if you and your spouse have not yet reached your time of retirement. 401(k)'s are specifically designed to be savings accounts for use once retirement age occurs. If this time has not occurred, there are ways to divide this asset without incurring penalties.

Since 401(k) accounts are designed for use after retirement, there can be penalties assessed for those that choose to dip into them before retirement. There are ways to avoid these penalties during the asset division phase of divorce. Early withdrawals are typically susceptible to a 10 percent early withdrawal fee besides taxes and fees. There is something that allows divorcing couples to avoid this fee.

To avoid the fee, one may be interested in what is called a qualified domestic relations order or QDRO, and it can be used during a divorce. Basically, if one spouse is entitled to a share of the ex-spouse's 401(k), a court-ordered QDRO allows the recipient to take the retirement money as cash.

The amount is subject to income taxes, but not the 10 percent penalty. This can be especially helpful for those who are strapped for liquid assets during a divorce, such as cash, since the freed up 401(k) can alleviate some of the financial pressure.

This scenario is particularly believable for families where one spouse was the breadwinner and the other spouse saw to the family duties. Since one person was taking an income, that person would earn the majority of the income and contribute majorly to the 401(k) fund. In comparison the other spouse would likely be on the receiving end assuming no outstanding situations or prenuptial agreements barring the income differential.

Each case of asset division is different and will take a careful set of eyes to determine each specific of the case. Because of that, it is important to understand what asset division are available to divorcing spouses.

Source: nbcnews.com, "Consider this before treating your 401(k) like a cash machine," Sarah Obrien, October 19, 2015

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