Once you know that your marriage is heading for divorce, you may begin to wonder what the outcomes of the proceedings will entail. In particular, you may have concerns regarding property division and which assets you could potentially lose. An important aspect of this part of divorce relates to accounting for all assets. If you overlook an account or piece of property, what happens during division proceedings could easily catch you off guard.
One asset you may wish to pay particular attention to during divorce is your 401(k). The court could potentially divide this account during the process, but certain rules and laws apply to its division.
The purpose of the Employee Retirement Income Security Act relates to protecting retirement funds from going to someone not entitled to the benefits. Under this act, the court cannot assign the benefits to another person, but it does allow for an alternate payee as an exception, as long as the parties attempting to utilize an alternate payee follow the appropriate steps for doing so as dictated in ERISA.
If one meets the steps in accordance with the law, the court can then approve for a division of the retirement account if it suits the circumstances.
Of course, you likely know that taking money from a retirement account early could result in certain taxation. Therefore, you may wonder what type of taxes you could face in the event that you gain a portion of your former spouse’s 401(k) and how it will impact you financially. Luckily, you may have the ability to avoid taxation in the case of asset transfer during divorce.
If the court approves the dividing of the accounts, a qualified domestic relations order needs to apply to your case. After drafting the QDRO, it will need court approval. If the court accepts it, the order can help you avoid taxation on retirement funds you receive in the divorce settlement. Additionally, having the assets transferred directly to your IRA could also help avoid taxation.
Understanding the laws, regulations and orders needed to properly address the division of retirement accounts during divorce can prove complicated. Therefore, you may feel the need to gain more information on proper ERISA procedures and what goes into drafting a QDRO. Speaking with an experienced attorney who has knowledge on these topics may help you better understand your situation and options.