The amount of a 401(k) account that has accumulated during a marriage is considered to be marital property and thus subject to division in Massachusetts divorce cases. Although early withdrawals prior to the account holder’s reaching the age of 59 1/2 would normally give rise to an early withdrawal penalty, the law provides an exception to this when a withdrawal is made pursuant to a court’s order.
When the divorce occurs, the court will issue a qualified domestic relations order defining the portion of the account owed to the other spouse and listing the payee spouse’s identifying information. If the order is not prepared correctly, the account holder may still be subject to the penalty. Upon a correctly completed and submitted QRDO, the plan administrator will then withdraw the amount ordered for payment to the recipient spouse.
Although the account holder will not incur an early withdrawal penalty, the payee spouse will incur tax liability for the lump sum payment he or she receives if that is the manner in which they choose to receive what is owed. They may thus wish to explore other options, such as leaving the portion owed to them in the account of their spouse, with the percentage that belongs to them clearly defined in the QRDO. While the recipient will not be able to add funds to the amount or to withdraw prior to when their spouse does, doing so may provide some tax benefits. Another alternative is to roll the finds received over into an IRA.
People may want to forge agreements with their spouse so their 401(k) balance remains untouched. It is possible to exchange a greater portion of another asset in exchange for doing so in an equitable division. For help with negotiating an agreement, people may want to seek the help of a family law attorney.
Source: 401k.org, “401(k) and Divorce“, December 29, 2014