Living in Orange County, California, is expensive; we all know that. And when you divorce, your finances will be more important than ever as you face living in a two-income community on just one income. But you have a better chance of long-term financial health if you have help from your lawyer and financial adviser in the divorce process to make wise decisions. Start with your 401(k) retirement account.
Since California is a community property state, the accounts are considered joint property. This means a court generally will divide the accounts in an equal share. You and your spouse, if you agree, could present an alternate plan to the judge, however. That might occur if one of you earns considerably more than the other. Once that agreement is made, you will need a Qualified Domestic Relations Order (QDRO) for the judge to sign and for you to submit to the plan administrator. That allows for money to transfer hands.
Make sure the decision that is made follows the rules of your 401(k) plan administrator. The exact way money is split will depend on those regulations that administrators have put into place to comply with the Employee Retirement Income Security Act (ERISA). Your attorney and financial adviser will need to have copies of the rules as they go through the process.
Once the divorce is finalized and the QDRO is submitted, money can safely be transferred without penalties. That also could be done by rolling over the funds into an IRA –though if you choose that path, be sure to find out if any penalties could apply.
If you need the money right away, and if it is allowed by the approved QDRO, you could take a lump-sum cash distribution without facing a tax penalty, no matter how old you are. Income tax still would be due, however.
Divorce is hard enough without having to deal with financial decisions that are hardly run-of-the-mill and trying to interpret this alphabet soup of laws. These rules are difficult to interpret without professional help. Make sure to have an experienced family law attorney, and a financial adviser, if necessary, on your side.