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What happens to a 401(k) when a couple divorces?

On Behalf of | Nov 19, 2023 | Divorce

There are a lot of financial “moving parts” to a divorce, especially when couples have been together long enough to merge their money.

Getting a divorce always means dividing up the marital assets – which can get tricky with long-standing retirement plans that are in only one party’s name, like a 401(k). If you’re in this position, it’s important to understand the purpose of a qualified domestic relations order (QDRO) and how one is used.

What’s a QDRO?

In essence, a QDRO is a legal order that specifies exactly how retirement funds are to be divided between divorcing spouses. They’re used to establish and enforce the rights of an alternate payee (the spouse whose name is not on the account) to receive their portion of the retirement benefits earned by the participant in the plan. The QDRO specifies either the exact amount or the percentage of the retirement benefits that are to be paid to the alternate payee. The QDRO also provides the plan’s administrator with instructions on how to distribute those benefits.

One of the chief benefits of a QDRO is that it protects the non-owner spouse’s interest in the retirement funds and allows those funds to be transferred to the non-owner spouse without the penalties that would normally occur without such an order.

How is this possible? Well, like many other states, Georgia follows an equitable distribution model when a divorcing couple has to divide their assets, and that emphasizes fairness. In cases involving long marriages, the funds in one spouse’s 401(k) may have been meant to provide for both halves of the couple in their golden years, and the money in that account was culled from marital funds. It’s only fair to make sure that the non-owner spouse receives an equitable share.

It’s important to note that a QDRO has to be approved by the retirement plan’s administrator to be put into effect, and the order has to be specifically tailored so that it doesn’t require anything not permitted by the plan itself. Because these can be complex and there’s so much on the line, it helps to discuss how retirement funds can be divided early in the divorce process by seeking legal guidance as proactively as possible.

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