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Factors to consider when dividing up a 401(k) during a divorce

Outside of a home, it's likely that one of your largest assets is all the money that's contained in a 401(k) retirement account. When you're facing a divorce, you and your ex will likely have to come to an agreement about how to split up those assets.

A study conducted by the American Academy of Matrimonial Lawyers in 2016 found that the three issues that divorcing couples seem to fight over most are businesses, retirement plans and alimony at 60, 62 and 83 percent respectively.

Unless you do your own due diligence before agreeing to split your retirement account, there's a strong likelihood that you'll find yourself on the hook for paying exorbitant penalty fees or taxes. Alternatively, you may end up giving your ex far more than they deserve.

If your ex is intent on claiming a portion of your pension, then they'll typically have to do so by filing a qualified domestic relations order (QDRO) for each account of this sort that you may have.

This document serves as a supplement to your divorce decree. It allows your ex's attorney to contact your retirement plan's administrator to determine what the steps are to transfer proceeds from the account to their client, whether now or in the future.

All QRDOs should be carefully reviewed before they're submitted to the court. You need to ensure that they are in alignment with what's stated in the divorce decree.

In looking it over, you may also want to make sure it states that your ex will receive a certain percentage of the 401(k), as opposed to a set amount of money. Additionally, the QDRO should clearly spell out any special instructions for the transfer of funds such as their rollover into an IRA.

If direct payments are going to be made, then the QRDO should clearly state so. If this is what your ex elects to do, then they can avoid having to pay 10 percent as an early withdrawal penalty, although they'll have to pay taxes on what they receive.

Ultimately, a QRDO must be approved by the retirement plan's administrator before any transfer can happen. If you're considering divorce and you'd like to work out an agreement that will allow you to keep as much of your 401(k) as possible, then a Naples complex asset division attorney can provide guidance in your case.

Source: CNBC, "How to avoid mistakes in dividing up 401(k) assets in divorce," Sarah O'Brien, March 07, 2018

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