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Should a 401(k) be divided by percentage?

On Behalf of | Nov 8, 2019 | Complex Property Division

When Kentucky couples decide to end their marriages, retirement accounts and pensions are frequently divided between the spouses. If you are going through a divorce and you or your spouse has a 401(k), you want to be sure of exactly what you are getting. Even if you successfully reap a portion of the 401(k), you might end up with less than you could have received because of how it was divided.

CNBC explains a possible pitfall involved in dividing a 401(k). As with certain pensions and retirements, a 401(k) can be divided by a qualified domestic relations order (QDRO). QDROs are created separately from divorce agreements, but are derived from the terms of the divorce settlement. QDROs can divide 401(k)s by placing money into a rollover IRA or by giving the money to a spouse directly.

A problem may arise if the QDRO does not divide the money by percentage. Some couples split a 401(k) by giving a spouse a specified amount. However, if the spouses intended to split the money 50-50, then the QDRO should specify that a receiving spouse gets 50%. Otherwise, if the 401(k) posts losses or gains before it is divided, then the amount a spouse receives might no longer be half of the 401(k). The spouse could end up with less money than was intended.

This is not the only problem that can arise while splitting a 401(k). Beneficiary changes can also cause a spouse to lose out on 401(k) funds. While you are married, you have approval or disapproval authority over beneficiaries to the 401(k). If you should agree to waive your rights as a beneficiary before the divorce is finalized, you might lose out on any claim to the 401(k) if your spouse passes away.

These and other potential problems with splitting retirement assets and pensions should be considered while speaking to a divorce attorney. Keep in mind that this information is only for educational benefit and is no substitute for the advice for a professional attorney.