When people plan ahead for divorce, strategizing for a comfortable retirement is often at the top of the list. You likely have a wide range of assets that will be divided in your settlement, including any retirement accounts. Your 401K is subject to equitable division in Ohio, so below we will explore how your 401K will be divided and what you may need to think about to make the most of the division without paying taxes early or being penalized.
How are 401K Plans Divided?
401K plans are divided using a Qualified Domestic Relations Order, or a QDRO. A QDRO is used to designate someone other than the primary account owner as a recipient with the right to receive some or all of the participant’s benefits. Typically, a QDRO will be drafted by your legal team in coordination with the retirement plan administrator’s requirements for dividing the account.
Once the QDRO is complete and approved by the court (or another state agency), the company that manages the 401K plan will need the QDRO and likely a copy of your signed divorce decree. With these documents, the company will then divide the account as it was stipulated in your agreement. In Ohio, your plan will be subject to division according to Ohio’s equitable distribution rule. Equitable does not necessarily mean 50/50, though, and keep in mind that any money you put into your 401K before getting married is considered separate property, and therefore not subject to division.
Options for 401K Division
Usually, there are two options for how to divide the 401K. The first option is to divide the 401K into a separate account for the ex-spouse. By starting a retirement account in their name, the receiving spouse will not be required to pay taxes until retirement, which is as it would have been before the divorce.
The second option is to take the distribution in cash, although this would lead to tax due and a potential penalty. Retirement plans are generally not taxable until the plan is distributed upon retirement. However, if the plan is assigned early in a situation such as a transfer to a spouse, the plan may be taxed early. If the receiving spouse has filed a QDRO, they may be able to avoid tax liability, but if not, they may end up paying a penalty of around 10% depending on their age.
Get in Touch and Make a Plan
If you want to get a better understanding of how your assets might be divided, or you want to make a plan with a financial professional to set you up for greater success as you look ahead to retirement after your divorce, get in touch with us today to schedule your free initial consultation call.