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Avoiding the early withdrawal penalty with 401(k)s after divorce

Texas law treats most property obtained by either spouse during the marriage to be community property, to be divided upon the termination of the union. Many Texas residents have 401(k) retirement accounts as a result of their career and work activity. If a married person with such an account gets a divorce, the amount that was contributed to the retirement account during the time of the marriage will be considered a marital asset and subject to the normal terms of property division.

One of the first actions any divorcing individual should take may be to contact their 401(k) plan administrator. Plan administrators might have a prewritten qualified domestic relations order already made out for their plan. Their model QDRO may be filled out with all required information and then given to the judge to be turned into an official court order.

After the court has issued the final QDRO, the plan administrator will verify it. This requires the administrator to ascertain that the order is legally valid, notify the account holder and any alternate payees that they have carried out the order and provide separate accounting for all payees. After this process is properly completed, the amount disbursed by the QDRO is considered to be exempt from the 10 percent penalty tax on an early withdrawal. The age of the payees is not relevant for this type of withdrawal.

Any failure to fill out and apply the QDRO properly can result in the amount of the 401(k) disbursed to the former spouse or qualified dependents being deemed an early withdrawal subject to penalty. An attorney's assistance can be helpful in ascertaining that all required actions have been taken with this and other issues that often arise in a high asset divorce.

Source:, "401(k) and Divorce", December 31, 2014

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