The division of retirement accounts is often one of the many issues that needs to be addressed in a divorce matter. Although trying to retain retirement accounts you may be awarded in divorce is often advisable, you may also need some of these funds in order to secure housing, pay off debts, or just to maintain your standard of living. If most of you and your spouse’s savings are tied up in retirement with an employer, then liquidation of all or a portion of your share in your spouse’s qualified retirement plan may be an option to consider.
Typically, any withdrawal from a retirement plan prior to age 59½ is subject to a 10% early withdrawal penalty and income taxes. However, if your divorce settlement awards you a portion of your spouse’s 401(k), 403(b) or other Defined Contribution Plan pursuant to a Qualified Domestic Relations Order (QDRO), you (as the non-employee spouse) are permitted to make a one-time withdrawal without having to pay the normal 10% penalty, even if you have not reached age 59½. In order to avoid the penalty:
Of course, any monies you withdraw are still subject to federal taxation as income to you. Most plans will withhold 20% of any funds you withdraw as pre-payment of taxes. As a result, this 20% withholding should be taken into consideration when determining how much you will need to withdraw so that you obtain the net amount you want. Further, depending upon your income level, your taxable rate may be higher than 20%; therefore, you should also consult with an accountant or financial advisor to determine if additional monies should be set aside to pay these taxes later on when you file your annual return.
Division of retirement assets can be complicated and confusing. Our team of experienced professionals can assist you in drafting a well-written divorce agreement which can help you avoid issues down the road. We cover Nashua and most of New Hampshire. Call us today, (603) 883-0797, to schedule your free half-hour consultation.
The author is Michael J. Fontaine. Esq.
Co-authored by Wendy Borrun, WWF Paralegal
This blog is intended for informational use only. The information contained herein should not be construed as offering legal advice or a legal opinion.