California residents who get divorced will want to understand the different things that may impact the financial outcome of this major life event for them. During the discussions about how to split a couple’s assets and debts, the subject of retirement accounts may well arise. In marriages where one person’s 401K account is identified as a major asset up for being split between both parties, special care will be required in order to avoid some potential taxes and penalties.
The United States Department of Labor explains that because 401K accounts are held in one person’s name only, that is typically the only person who is legally allowed to receive money from an account. However, in the case of a divorce the creation of a qualified domestic relations order may allow the other spouse to be identified as what is called an alternate payee on the account. With this in place, money can be paid from one person’s retirement fund to the other spouse to satisfy a property division award.
If a QDRO is not used and the account owning spouse simply withdraws money from the 401K and pays it to the former spouse, the account owner may be assessed early withdrawal penalties as well as income tax on that money.
Per the Internal Revenue Service, tax responsibility lies with the recipient spouse if a QDRO is used. Taxes may be avoided upon receipt if the person puts the money into another qualifying retirement account instead of simply keeping it in the bank or spending it.