Marital Property Distribution

• Courts divide property using their state's property distribution laws. Most states follow the common law equitable distribution rule, and judges distribute marital property equitably. Each spouse may retain ownership of the amount of funds in their pensions and 401k plans earned prior to marriage. The remaining amount is generally marital and subject to equitable distribution. State laws may allow judges to award property as they deem fit in the interests of justice and fairness. Judges may even divide separate property or award it to the other spouse in states that allow judges to consider marital fault or economic conditions as factors for unequal distribution.
  
  

Tax Laws

• According to the Internal Revenue Service, 401k accounts are taxable when a recipient withdraws funds from the account before reaching legal retirement age. Furthermore, the IRS assesses an additional 10 percent tax penalty for withdrawing funds prematurely. Generally, beneficiaries who withdraw their funds before reaching 59 1/2 can withdraw their accounts without having to pay the 10 percent penalty only if they can show financial hardship, if the 401k plan terminates, or in the case of employment termination or a qualified divorce decree.
  
  

Qualified Divorce Decrees

• To avoid paying the 10 percent tax penalty, spouses must have a binding qualified divorce order or decree allowing them to withdraw their share of the marital funds or roll the funds over into an alternate 401k plan. The Employee Retirement Income Security Act is the federal law regulating retirement accounts. According to this federal law, properly drafted qualified domestic relations orders provide divorcing spouses with the ability to access their funds without paying the penalty. However, spouses are subject to normal taxes on withdrawals, based on their tax rates.
  
  

Qualified Domestic Relations Orders

• Qualified domestic relations orders are court decrees that allocate a certain ownership right to the 401k assets. Without the QDRO, the owner of the account retains sole ownership of the account's assets. Additionally, QDROs allow early distribution or withdrawal without the 10 percent penalty. Properly drafted QDROs include the names of the alternate and primary payees, addresses, distribution percentages, method of determining division at a later date and name of the plan manager. Spouses who decide to cash their distributions after obtaining a divorce and QDRO must provide the 401k plan manager or administrator a copy of the original QDRO.
  
  

Considerations

• Because family laws can frequently change, you should not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your jurisdiction.