The decision to get a divorce in Hot Springs touches off a flurry of activity that must occur before a marriage is officially dissolved. Among the most complex processes (and potentially most contentious) is the division of marital property. Many often overlook the fact that contributions made to a retirement account (such as a employer-sponsored 401k) during a marriage are also listed amongst a couple’s shared assets (if an employer matched an employee’s contributions, those funds are considered marital assets, as well). Divorcing spouses have options when dividing up 401k funds, so research should be done to determine which would be most advantageous.
Some might say the easiest method would be to simply liquidate the portion owed to an ex-spouse and pay him or her one lump sum. However, this could result in the contributing spouse facing serious tax penalties. If this is the way a couple chooses to go, the contributing spouse should work to specify in the divorce agreement that the responsibility for those penalties should be shared.
The 401k Help Center offers the idea of rolling the owed funds over into a separate 401k account. To do this, the contributing spouse must obtain a Qualified Domestic Relations Order that allows a plan provider to direct funds to an alternate payee. The primary advantage of this method is that it allows both spouses to set the investment strategies for their individual accounts.
Obtaining a QDRO can be costly, however, which is why the website Sensible Money recommends that divorcing spouses who both have a 401k and an IRA transfer the money owed for the 401k from one IRA to another. Doing this requires only an authorization letter from the court and a simple IRA distribution form, potentially making it more cost-effective than seeking a QDRO.