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Dividing a 401(k) plan during divorce

On Behalf of | Jul 26, 2023 | Divorce

The division of property during a divorce involves all the assets a couple has acquired during the marriage. This will often involve the division of one of the spouse’s 401(k) plans. It is important to understand how the division of 401(k) plans works if you and your spouse plan to divide a 401(k) plan in Michigan.

Why might you divide a 401(k) account?

During a divorce, as the spouses negotiate their settlement, their 401(k) plans might be included in their negotiations. If both spouses have plans of similar value, they might agree to keep those intact and divide their other assets. However, in other cases, one spouse’s 401(k) plan might need to be divided.

You need a QDRO to divide a 401(k)

A qualified domestic relations order is needed to divide a 401(k) during the divorce. This order, which is defined as an order to use retirement assets to pay for child or spousal support or as part of a divorce settlement, establishes how the value of the 401(k) will be divided and distributed. Some of the options for this include:

  • A shared payment, where each of the spouses receives a portion of each payment made from the retirement plan
  • A separate interest arrangement where the value of the 401(k) is divided between the two spouses and the alternate payee’s portion is moved into a new 401(k) account with the plan administrator
  • A separate interest arrangement where the alternate payee takes a lump sum payment and rolls it over into an IRA or where spouses work out a different benefit payment system

Depending on the choices made during the division of property, spouses might have tax liabilities when they divide their 401(k) plans. However, rolling it over into another 401(K) or IRA can help you avoid some of the tax penalties.