A divorce will affect your life in many ways, including your retirement. Retirement accounts such as your 401(k) that you have contributed to during your marriage will be fair game for division in divorce. For this reason, you should understand how to properly divide your 401(k) or risk losing money to unnecessary fees and taxes.
Situations will differ across couples. The Motley Fool describes some possible ways you may divide up a 401(k).
Use a QDRO
You will need a court to issue a qualified domestic relations order to split your 401(k). This allows you and your spouse to avoid paying taxes for prematurely withdrawing 401(k) funds. Generally, couples who divide a 401(k) split it into two accounts, with one owned by you and the other owned by your spouse.
Roll money into an IRA
Another option is to take your 401(k) money and put it into an IRA. You would roll your 401(k) funds into an IRA and then divide your spouse’s portion into a separate IRA. This will probably cost you a rollover fee, but it should not be substantial, plus you should only have to pay the fee once. This can also allow you to avoid taxes until you draw on your IRA for your retirement.
Keeping all of your 401(k)
It is not out of the question that you might complete your divorce with your 401(k) completely intact. If you and your spouse each have your own account with nearly equal amounts of money, there may be no need to split each other’s 401(k). As an alternative, you might give your spouse a greater portion of another retirement account to avoid tapping into your 401(k).
These are a few examples of how to handle a 401(k). The option you choose will depend on various factors, such as your priorities for your future and whether it is feasible for you to exercise an option to divide your account.