Dividing a 401(k), IRA or pension

A 401(k) or a company pension: the court order

A workplace retirement plan cannot pay part of one spouse's account to the other just because the divorce decree says so. It needs a qualified domestic relations order, a QDRO: a state court order that gives you, as the former spouse, part of the benefit. The plan calls you the alternate payee. The court writes the order, but the plan administrator decides whether it qualifies, so an order the plan rejects pays nothing until it is fixed.

Ask the plan before the order is written

Each plan has its own written procedures for these orders. As the person who would be paid, you are entitled to information about the plan and the benefit to prepare the order, including the summary plan description, and when the plan receives an order it must tell you and send you its procedures. Ask early. An order cannot make a plan pay a type of benefit or offer an option it does not already have, so an order written without the plan's rules in hand is often sent back.

An IRA is divided differently

An IRA does not use a QDRO. Moving all or part of an IRA to a former spouse under the divorce decree is not a taxable transfer, and from that day the part you receive is treated as your own IRA. The decree or a written agreement that goes with it is what makes the move tax free.

Taxes, and the one penalty exception that matters before 59 and a half

Money paid to you from a 401(k) or pension under a QDRO is taxed to you, not to your former spouse. If it is an eligible rollover distribution, you can roll it over tax free into your own IRA or another plan, and it stays untaxed until you withdraw it.

Withdrawals before 59 and a half usually carry an extra 10% tax. Payments to a former spouse straight from a workplace plan under a QDRO are one of the exceptions. The exception does not apply to distributions from an IRA, and that includes an IRA you received in the divorce or rolled the money into. If you will need some of the money before 59 and a half, when and from where you take it changes what you keep. That is worth settling with a tax professional before the order is signed.

Government pensions follow other rules

Federal, state and local government plans are not covered by the law that created QDROs, so each has its own process. A federal civil service pension (CSRS or FERS) is divided by a court order the Office of Personnel Management processes under its own regulations. An order written on a standard QDRO form is not acceptable for a federal pension unless it says its CSRS or FERS terms are governed by those rules. For a state or city pension, ask the pension system for its own order requirements.

Before you trade one asset for another

A dollar in a 401(k) and a dollar of home equity are not worth the same: one is taxed when you take it out, the other may be partly tax free when you sell. The house against the 401(k) calculator puts both on the same footing with your own figures. Your state's rules decide how the total is shared; each state's page has them, starting from which states split property 50/50.