Couples who are working through divorce in Colorado and who also have 401(k) accounts may be surprised to learn that their spouses may be entitled to a percentage of the account balance. The portion of 401(k) accounts that accrued during the marriage are considered to be marital property subject to equitable property division in divorce proceedings.
The law allows the withdrawal of the amount ordered by the court without the early withdrawal penalties given in the event that both spouses are under the age of 59 1/2. This will prevent the account owner from being taxed on the amount paid to his or her spouse out of the account. The person who receives the proceeds should be aware that if they take the amount in a lump sum cash amount, they will be taxed on the amount received.
The withdrawal on the 401(k) account is made using a Qualified Domestic Relations Order, or QDRO. These orders are issued by the family court and detail how the accounts are to be divided. If the order is not created correctly, the account holder may be subjected to the early withdrawal penalty. Recipients may benefit by keeping the money received in their spouse's 401(k) with their amount designated as separately held. Although the recipient spouse will not be able to add funds to the account, the advantage is that they will be able to thus take advantage of the account's tax protection.
Those preparing to divorce who either have a 401(k) account or whose spouse owns such an account may want to speak with a family law attorney concerning how the accounts may be divided. As there are several options to avoid penalties and taxes, the available ways to handle the accounts should be carefully considered and discussed with an attorney.
Source: 401k.org, "401(k) and Divorce", December 24, 2014