Tags: Retirement | alimony | 401k | retirement

How Alimony Affects My 401(k)

By    |   Monday, 24 August 2015 08:52 PM

In a divorce, asset division may allow for both alimony payments and a split of a 401(k), depending on where a splitting couple lives or a judge's decision.

Some states are known as community property states and others are called equitable distribution states.

In a community property state, "all assets and debts acquired during the marriage are considered ‘community property,’ which means both spouses own the property jointly, and the property will be divided equally (50/50) between the spouses at divorce. This can include contributions to retirement accounts such as 401(k) accounts," noted DivorceNet.

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In equitable distribution states, a court makes a determination on property — with a judge typically deciding on a fair split, which is sometimes not an equal split, DivorceNet said.

It added: "Equitable distribution states have different rules on how property is categorized, either as marital (joint) or separate. … During the divorce negotiation process, there are often trade offs being made. For example, you may ask to keep your entire 401(k) in exchange for some other asset."

There are four types of alimony, according to WomansDivorce.com. They are: permanent, temporary, lump sum, or rehabilitative alimony.

According to DivorceNet , among the bigger financial blunders couples make in a divorce is failure to understand the rules of retirement accounts.

Early distributions taken before a spouse turns 59 1/2 get a 10 percent tax penalty on top of income-taxes paid. "An exception to this rule, however, is a transfer of the retirement plan (or a portion of it) to a spouse as part of a divorce settlement," DivorceNet said, noting the importance of receiving a Qualified Domestic Relations Order (QDRO) when assets in a split are transferred.

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If a divorcing spouse received assets in a plan like a 401(k), those are subject to 20 percent mandatory withholding, DivorceNet said.

To avoid that, "the transfer must be made directly to another retirement account, such as your own IRA. Once the assets are in your retirement account, you will once again be subject to the early distribution rules."

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In a divorce, asset division may allow for both alimony payments and a split of a 401(k), depending on where a splitting couple lives or a judge's decision.
alimony, 401k, retirement
366
2015-52-24
Monday, 24 August 2015 08:52 PM
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