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What Happens To a 401K In a Divorce?


I sometimes get asked if there is a way to cash in a 401k plan when parties are getting a divorce, and if the 10% additional tax penalty will apply. Taxable distributions from a qualified retirement plan are generally subject to an 10 percent additional tax if they are made prior to the participant reaching the age of 59 ½. However, there is an exception to the 10% additional tax and it will not apply to distributions to a nonparticipant under a qualified domestic relations order. A distribution made by a qualified domestic relations order (QDRO) to an alternate payee (such as the ex spouse), under the terms of a QDRO is taxable to the alternate payee and not to the participant. When a 401k is divided in a divorce settlement agreement, and is to be divided by a Qualified Domestic Relations Order, once the QDRO is completed and filed with the plan administrator, the alternate payee has the option of cashing in the 401k money without incurring the ordinary 10% penalty. The alternate payee will be taxed on the 401k money, along with whatever other sources of income they may have in that particular tax year at their ordinary tax rates, after adding the 401k money to their regular sources of income. It is strongly advised however, that prior to doing so, to seek the advice of a certified public accountant or your divorce lawyer to insure that the 401k can be safely cashed in, without causing any further or unnecessary tax implications. This rule is only applicable in a divorce setting, and only where there is a qualified retirement plan divided by a QDRO.

Many times when going through a divorce, the retirement plans of the parties are the most lucrative assets of the marriage. The retirement accounts, including 401k plans, are subject to equal division under the law in Wisconsin. If you have questions on your property rights or how to divide up retirement plans, contact the experienced family lawyers at Karp & Iancu, S.C.

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