Can I split a 401K in my divorce without paying taxes?
Divorcing Tennessee spouses who must split 401K retirement accounts should learn about the qualified domestic relations order.
When getting a divorce, many people in Tennessee end up having to split their 401K account assets with their spouse. This has become a relatively common part of many property division settlements today, especially as a retirement account may be one of a couple’s most valuable assets.
However, as with other elements of a property division agreement, there may be tax implications of splitting a 401K account. Before proceeding, people should understand what is involved in this split in order for them to assess what is in their best interest. It is also wise to learn about the ways to potentially avoid being hit with a large tax bill.
The qualified domestic relations order
The U.S. Department of Labor explains that when a person withdraws money from a 401K account for any non-retirement purpose, both taxes and early withdrawal penalties may apply. The use of a qualified domestic relations order may help people prevent both of these things. This is essentially a way for people to maximize the amount of money they preserve from their hard-earned savings.
With a QDRO, the spouse who does not own the account can be named as an alternate payee on the account. This then allows them to receive distributions directly as per the QDRO and divorce decree. The plan participant is therefore not taxed nor assessed any fees.
According to the Internal Revenue Service, the spouse who receives the money would be responsible for reporting the income on a tax return. If that person makes the choice to invest the money into another retirement fund, the taxes may be avoided altogether.
Child support and spousal support
In addition to outlining provisions for a property division settlement, a qualified domestic relations order may allow the use of 401K funds to satisfy either a child support or a spousal support award.
If a person chooses to use a QDRO to make child support payments with retirement funds, the account owner will retain income tax responsibility.
If the person who owns the account chooses to tap into 401K funds to pay alimony, the spouse who receives the money will be responsible for taxes. Again, the QDRO would need to detail the exact amount of payments to be made and the recipient could elect to reinvest the money into another type of retirement plan.
Taking care of the details
There are many fine details involved in properly establishing a qualified domestic relations order. Working with an attorney in Tennessee who is experienced with these orders is always recommended to help prevent tax issues down the road.