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How to divide a 401(k) in a divorce

On Behalf of | Apr 29, 2023 | Divorce

North Carolina law stipulates that assets inside of a marital estate are to be divided in an equitable manner when a couple divorces. Generally speaking, retirement assets are considered to be part of a marital estate even if the account is in one spouse’s name. There are specific protocols that must be followed when dividing an individual retirement account (IRA) or a 401(k) if you want to avoid unnecessary tax and other penalties.

Dividing an IRA

In most cases, an IRA can be divided per the terms of your divorce decree. Depending on your settlement, some or all of the funds in the account will be transferred into a new account in the recipient’s name. Alternatively, whoever receives the transfer can opt to keep the funds in a personal bank account. However, doing so may result in an early withdrawal penalty and income taxes owed on the amount that is not transferred to a new IRA.

Dividing a 401(k)

A 401(k) or other qualified account such as a 403(b) cannot be divided without a qualified domestic relations order (QDRO). This tells the plan administrator that the transfer is pursuant to a divorce and that an early withdrawal penalty should not apply in your case. It also details how much is to be taken out of the qualified account, when the transfer is to occur and who is receiving the money.

Be patient

It may be tempting to simply divide the funds in an IRA or other accounts prior to the official termination of your marriage. However, doing so may trigger early withdrawal penalties even if the funds are being removed per the terms of a draft settlement agreement. Furthermore, you may be accused of improperly depleting marital assets if you move too soon.

Tax records, bank statements and other documents may be able to help you verify if an asset is sole or joint property. That may determine whether an asset should be divided in a divorce as well as provide guidance as to how it should be split.