Nearly all financial aspects of divorce are complex, but few are quite as complicated and consequential as the 401(k). When a 401(k) is included in the division of assets, you may find yourself facing costly penalties if you do not take the steps to divide it correctly. Those who try to draw from their 401(k) to cover the expenses of divorce also often find themselves in financial trouble. However, with the assistance of an attorney, you can mitigate the risks of dividing your 401(k) and protect your assets for retirement.
Dividing Retirement Assets With a QDRO
Qualified domestic relations orders, or QDROs, are used to divide employer-sponsored retirement and pension plans in divorce. Their purpose is to allow for the transfer of a portion of the assets to an employee’s spouse without incurring income taxes or early withdrawal penalties. As such, they play a crucial role in preserving retirement savings for both parties in the divorce.
However, employers or third-party plan administrators often charge a fee for dividing a retirement account with a QDRO, so you should be prepared for the possibility of another expense during the divorce process. Fees and costs may increase if the QDRO is not drafted correctly, so it is important to work with an attorney who has significant experience with QDROs and dividing retirement assets.
Using Retirement Money to Fund Your Divorce
As you prepare for the costs of divorce, you may find it tempting to draw from retirement savings to cover them. However, doing so can result in substantial tax penalties and significantly detract from your future retirement income. Especially if you are nearing retirement age, this can be a serious and costly mistake. Additionally, using marital assets from a retirement account to cover your personal divorce expenses can lead to negative consequences for you during the division of property.
Finding Alternative Solutions
First and foremost, divorcing couples should avoid using their retirement money to pay for the divorce. Instead, you could consider selling non-liquid assets that you no longer need, or try to save up for the legal process before moving forward. Second, when it comes to deciding whether or not to split the 401(k), you can consider alternative options, such as an agreement in which your spouse keeps a larger share of other assets so that you can keep your 401(k) intact.
Contact Our DuPage County Divorce Lawyers
If you or someone you know is going through a divorce, Andrew Cores Family Law Group can help. With our diverse background and experience, we have the skills and knowledge to effectively assist you in navigating the division of your retirement accounts and other assets. Learn more about how we can assist with your case by scheduling a free consultation. Call our experienced Wheaton divorce lawyers at 630-871-1002 today.