What to do about a 401(k) in a divorce

A New Jersey couple going through a divorce may need to split a 401(k) account. To do this, either the couple or a judge will need to decide how the funds will be allocated. The division may not necessarily be 50/50. Next, the couple will need a document called a qualified domestic relations order. This allows a distribution to be made from the plan following divorce without incurring a penalty. However, the people need to be younger than 59.5 and the QDRO must be forwarded to a plan administrator for approval.

There are several ways the distribution can be made. It can be rolled directly or indirectly into an IRA. The person receiving the distribution could also take it as a lump sum, but while it would be exempt from the penalty because of the QDRO, there would still be taxes to pay on it unless the person is older than 59.5. Another option is to delay the payments until the owner of the account retires. The recipient would need to start taking minimum distributions by the age of 70.5.

Some 401(k) plans will only permit this last option. Every plan has different rules around it, and these rules may limit how couples are able to divide the account.

There are other aspects of property division that may come up in a divorce as well. For example, major complications can occur if one or both partners own a business. Depending on what kind of agreements are in place regarding the business, one spouse might be able to claim a share of it. Other complications may arise if there are foreign investments or if one spouse feels the other is hiding assets. Legal counsel could help a couple through the property division process.