If you need to split a retirement account with your spouse during a divorce, you are not alone. Countless other couples in northern Kentucky have had to do the same thing. While this may be a common event in a divorce, it does not mean it is simple nor without its specific issues. There may be tax implications to splitting a 401(K) account between two persons, especially since only one of you will be named as the actual owner of the plan. What are those tax implications and can they be minimized?
Any distribution from a 401(K) that does not qualify as a retirement distribution may potentially be subject to both taxes and early-withdrawal penalties, even for the account holder. If you are the owner of such an account and you are ordered to give a certain portion of the account's value to your former spouse as part of your property division settlement, however, there may be a way to avoid these consequences.
The U.S. Department of Labor explains that a Qualified Domestic Relations Order allows you to do just this. A QDRO can identify your spouse as a legitimate payee on your retirement account. From there, distributions may be sent directly to that person, not to you. In this way, you will not be held accountable for any taxes or any penalties.
Property division settlements are not the only thing for which a QDRO can be used. If you need to access your 401(K) funds in order to pay spousal maintenance or child support, you can leverage the power of a Qualified Domestic Relations Order. Again, your ex-spouse or your child or dependent can be set up as an alternate payee and money can be distributed directly to them. This can be done for one-time or ongoing payments.