Your 401(k) may be your most significant and complex marital asset, especially if you have been married for a long period of time and have been contributing to it on a consistent basis. In the event of a divorce, a 401(k) is considered marital property, which means that it is subject to property division.
Legally splitting a 401(k) involves the following three steps:
- Your divorce decree needs to order the division of property of assets.
- You or your lawyer needs to draft a legal document called a “qualified domestic relations order” (QDRO), which provides details to your 401(k) administrator how to divide it in compliance with the Employee Retirement Income Security Act (ERISA).
- Lastly, the family court judge needs to approve and sing the QDRO, then the plan administrator must also approve it since they are liable to the federal government if the order contains errors.
The QDRO names your spouse as an “alternate payee,” which is a person other than you who can recover payment from your 401(k). Your spouse can either roll the proceeds over into her own retirement plan or have her share remain intact with yours in the existing plan, then taking her payments once you declare retirement. Furthermore, she can also choose to take the money as a cash payment.