Employer-sponsored retirement accounts are common benefits companies offer to employees and many companies match a significant portion of the employees’ contributions to further support their people.
These accounts may commonly be split in a divorce, leaving the employee who worked to save with far less than he or she had planned for. Some loss of these assets may be unavoidable, but some may be preventable with the right legal tools.
401K account owner distributions
Under normal circumstances, a 401K account’s funds are not touched until a person reaches retirement age. Distributions taken at this time are provided free of penalties but are subject to income tax assessment.
According to the United States Department of Labor, distributions that fall outside of the scope of retirement may be subject to early withdrawal penalties on top of the income tax assessments.
Authorized payee distributions
A qualified domestic relations order establishes another person as an authorized payee on the 401K account. The Internal Revenue Service indicates that this authorized payee may be the account owner’s spouse. The QDRO may be setup to facilitate the payment of 401K account funds to the spouse per the couple’s divorce agreement.
Distributions from a 401K account that follow the terms of a qualified domestic relations order avoid the early withdrawal penalties typically associated with a non-retirement distribution.
The authorized payee assumes responsibility for paying income taxes on the money received. If the authorized payee puts the money into another retirement account upon receipt, he or she may defer paying taxes until later making a withdrawal from that account.