Seeking an ex-spouse's 401(k) can be thorny |
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Stop making contributions
If you're involved in a court action to obtain a QDRO and still putting money into a 401(k), you may want to stop making contributions while your divorce is pending. Because money that hasn't been added to the 401(k) usually isn't considered part of the marital estate, it should be acceptable to stop adding money to the account. However, check with your attorney before making the change.
"If your company matches that money, you're giving some of it to your soon-to-be-ex-spouse," Cheong says. "It's a far better use of your money to not contribute at this point."
Start early
Don't wait until your divorce decree is final to begin working on your qualified domestic relations order. Not only will you save time, but you'll eliminate the impact of any catastrophes that happen after the divorce is complete. For example, if your ex remarries after the divorce and names his or her new spouse as the beneficiary of the 401(k), you could be left without any claim to the account if your ex dies before the order is ratified.
"To avoid this nightmare, draft the QDRO before the divorce and enter it in court at the same time as the divorce decree," says Denisa Tova, a certified divorce financial analyst with the Divorce Resource Centre of Colorado. Looking back on her experience, Johns says she wishes she would have followed that advice.
"Have all the paperwork signed before you ever go to court to finalize the divorce," she says.
Re-invest the money wisely
Once the QDRO is done and the money is split, the nonemployee spouse will have his or her own 401(k) account managed by the same company that manages the ex-spouse's account.
Still, it's not always best to leave your money in the 401(k). You won't get matching contributions that your ex does, and the investment options are usually limited to just a few mutual funds. Cheong advises rolling the money into a qualified retirement account, such as an IRA, or individual retirement account.
"You'll have the whole market to play with and have all the different investment vehicles at your hand," Cheong says.
Be sure to have the money sent directly from the 401(k) to the company that manages your new IRA. Withdrawing the money yourself and placing it in an account could leave you on the hook for a 10-percent penalty, plus income tax on the money that's removed.
If you know you're going to need money from the 401(k) to settle post-divorce debts, a little planning may help you get some of those fees waived. "The 10 percent penalty for withdrawal from the 401(k) can be eliminated if you write it into the QDRO," De Kok says. "That can be extremely valuable." But you'll still pay income tax on the money that's withdrawn.
When done properly, qualified domestic relations orders don't take much time to complete. The wait time is usually 45 to 60 days, De Kok says. So Johns, whose divorce is more than a year old, is understandably frustrated that her QDRO is still in legal purgatory. Between hiring a new attorney and traveling to another state for court, the process has been bothersome for her.
"It's just taken up a lot of my personal time," Johns says.
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