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Tips for dividing a 401(k) in divorce

In California, a 401(k) is usually considered community property in case of a divorce. This means it will be split between the couple. There are a number of ways this can happen.

The couple will need a document called a qualified domestic relations order in order to divide the 401(k). The QDRO must then be approved by the plan administrator. Therefore, it is important to understand the rules. The approved QDRO makes it possible for one spouse to take a distribution from the plan during a divorce without having to pay an early withdrawal penalty. This penalty is assessed anytime a withdrawal is made before the age of 59 1/2.

The distribution can be rolled into an IRA in order to avoid income taxes. It is also possible to take it as a lump sum distribution without paying the 10 percent penalty for being under 59 1/2 years old, but the person will still have to pay taxes on the distribution. Another option is to defer the payments until retirement. At the age of 70 1/2, the person will have to start taking minimum distribution. People going through a divorce may want to work with financial advisers and attorneys to determine the best method of distribution.

Other property can be divided using negotiations as well. The couple can go to litigation if they cannot reach a solution, but many prefer negotiation because it can be less expensive and also allows them more input into the final decision. Besides a 401(k), other types of property that may complicate the process include a business and a home.

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