401K in Divorce: A Tip That Can Save You Thousands

Unfortunately, going through a divorce leads many people completely cash-strapped. While not ideal, if you have not built up enough liquid savings, you might be considering a withdrawal from a 401K. Here is an important tip you need to know about a 401K in divorce. This only works if you are awarded all or part of your spouse's 401K. It does not work for your own.

Your Spouse's 401K in Divorce

When you file the Qualified Domestic Relations Order (QDRO) to have all or part of your former spouse’s 401K distributed to you, you have an opportunity to take cash out of the account without paying the IRS’s 10% penalty (on funds withdrawn prior to age 59.5). To take advantage of this, when dividing a 401K in divorce, have the portion you need, paid directly from the account to you.

It does not need to be the full amount that you are receiving.  Do not roll it into an IRA and then take it out because then you will be subject to the penalty.

Am I suggesting that retirement...

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QDRO: I need a what??

If part of your divorce settlement includes a division of retirement assets held with a current or former employer, you may need a QDRO (Qualified Domestic Relations Order) or similar document, depending on the retirement plan. One of the mistakes that I see people make when dividing assets, is simply dividing each account down the middle. Seems like it would be fair, right? While it might be fair, it may also cause you to incur more costs than you would, if you were a little more creative about your settlement.

There are a couple of costs to consider. There is a cost to having someone draft the QDRO, which generally ranges from $450-$1000. Additionally, each plan charges an administrative fee on their side as well. That fee generally ranges from $350-$1000. Thus, if you are dividing up several plans, the administrative process may become costly.

Important things to know about QDRO's:

1. You must know what the plan that is being...

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