Alabama couples who are going through a divorce should be mindful of potential mistakes that can cause real problems when they divide their 401(k) assets. One of the greatest sources of conflict in a divorce is the division of 401(k) assets as retirement funds are often a divorcing couple’s greatest source of income. When a 401(k) is improperly divided, there may be steep tax penalties. In some cases, improper 401(k) division can even mean one spouse receiving far more to which he or she is entitled.
Individual retirement accounts and workplace retirement plans are not divided the same way. For example, when a couple is dividing a workplace retirement plan, the person who is receiving his or her spouse’s benefits needs to use a qualified domestic relations order, or QDRO, to access his or her share. While a QDRO is certainly based on the divorce agreement, this document is a separate entity. Therefore, divorcing couples should take care to look it over with an attorney who is experienced in property division to make sure the contents of the divorce agreement are adequately reflected.
Another thing divorcing couples should remember is that the 401(k)’s recipient should never change his or her beneficiary before the divorce is finalized. Naming another beneficiary can jeopardize the entire 401(k) in the event of a spousal death. If the remaining spouse is not currently the beneficiary, and the divorce has not been finalized, he or she may lose the ability to claim any part of the 401(k).
When it comes time to divide a 401(k), an attorney with experience in property division may prove to be a valuable asset. A lawyer may be able to help draft a QDRO that adequately reflects the divorce agreement. Dividing assets without the assistance of an attorney can be risky and may result in detrimental complications.